source article: Michael A Gayed
I find it fascinating the barrage of press the pure "index investor" fans can produce. However inevitably there will be a couple of points the "passive' crowd overlook.
Firstly, believe it or not, the stock market is not the money market! Yes... risk matters. Additionally, risk matters most when it appears risk no longer exists.
The performance of the ASX is somewhat different to global stock markets as the the US stock market is up for 9 straight months. The scenario there is a backdrop of a declining USD and yields which refuse to rise in any meaningful way. The VIX seems to hit all-time lows quite often lately. I am no Nostradamus as to any likely outcome, but this extremely low volatility is a "take note" situation.
The passive exponents keep going on about active fund managers that are not outperforming. No argument there. However in overall performance terms I do know that that being down less than the market is far more important than being up more, over the medium to longer term. The obsession with “beating the market” on the upside is absurd when mathematically to beat the market, you need to not get beaten in a down move when volatility rises. As someone who does a bit of market modelling it seems crazy that no one seems to remember that. It’s been a long time since a correction not only came, but lasted very long before "buy the dip" became the rage.
It is worth reminding investors here that the pre-cursor to an age of turbulence is an age of moderation, let alone an age of absurd market confidence in an unknowable future. Low volatility won’t last forever. When it ends, no-one knows, but every day that goes by, the end inevitably draws closer.
Various historically proven leading indicators of risk have had a streak of false positives, warning of a decline that never comes. Much like the boy who cried wolf, many of these indicators are now ignored. The problem of course is that the boy who cried wolf was ultimately right. By the time he was proven right, he became a man given how long it took.
Time is the only thing that will upset the stock market. Volatility and risk have not been eradicated, and they are lurking in the shadows. How do we prepare in case volatility starts to pick up? Ultimately one will have to be less correlated to equities broadly. The problem is that most uncorrelated strategies have under-performed for quite a while know, as the "passive press" remind readers.
It is not "different this time" and at some stage and an old fashioned method of buy low and sell higher as opposed to buy high and sell higher will become trendy once again....eventually.