Personal Wealth Management / Expert Commentary
With Ken Fisher — 1/24/2023 | 9:27 minutes
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher explains why passive investing—for example, buying a low cost index fund and holding it—isn’t as easy as many believe. Ken believes a passive approach can be effective, but notes most investors fall prey to their own emotions amid developing market trends and are unable to remain passive in the long-term.
Ken thinks if passive investing was easy, most investors wouldn’t lag the market. Ken cites a famous, annual behavioral study by DALBAR Inc.,* which evaluates fund flows for a passive S&P 500 instrument over a 20-year period. The study finds that investors try and time the market–buying and selling at suboptimal times, causing them to underperform the S&P 500 over that time. While Ken suggests several strategies to remain passive effectively, he suggests that knowing yourself and your behavioral tendencies is key to being a successful long-term investor, regardless of what you invest in.
A man appears on the screen wearing a navy suit, sitting on a chair, behind him is a white screen with the title “Debunkery”
He begins to speak.
Ken Fisher: Passive investing can be perfectly fine if you can actually do that. But it's very emotionally hard to do that over time on a sustained asis, which is what you need to do necessarily to be a passive investor. You have to actually be passive yourself, not just own passive instruments. Most people can't do that with all the scary thoughts in the world and all the times there's optimistic thoughts.
On the white screen a title appears “DEBUNKERY” with subtitle “Seeing Through Wall Street’s Money-Killing Myths”
Ken Fisher appears back again in the same position.
Ken Fisher: A lot of people will tell you that passive investing is good and easy. I'm going to tell you passive investing can be very good. It's really not so easy, and it looks easy, but there's a lot of things in life that look easy, that actually aren't easy to do. And I'd like to take you through a little bit of that briefly, if I may. This comes directly out of my book Debunkery, that had a little chapter on the fact that passive can be a fine thing to do, but it's not easy to do for almost anyone. Now, first, if you're being passive, what does that mean? It means basically buying a low cost index and then holding it. And if you do that, you will do better than most investors because you'll get the index return less, whatever the costs are associated with owning that index and most investors do all kind of stupid stuff all the time and do much worse than the indexes.
On the screen a 2 V shaped indexes appears, the first one represents the passive investment. And the second one represents the active investment
Ken Fisher: The fact is, passive investing can be perfectly fine if you can actually do that. But it's very emotionally hard to do that, over time on a sustained basis, which is what you need to do necessarily to be a passive investor. You have to actually be passive yourself, not just own passive instruments.Most people can't do that with all the scary thoughts in the world and all the times there's optimistic thoughts, great opportunities ahead, horror and fear ahead. So let me just take you through that. Historically, you can measure and it's been done lots of times, lots of ways, that most investors most of the time will in and out at all the wrong times. I know that's not you. You would never do that, but most investors do.
On the screen a chart appears, this chart shows a Hypothetical Growth of $1 Million Dollars Invested 25 years, 12/31/1996 to 12/31/2021.
Ken Fisher: in that book Debunkery, some years ago, I cited a famous study from an organization called Dalbar that looked at a 20-year history of S&P 500 passive returns and the flows in and out of them from its shareholders. Now, the S&P 500 passive index is the archetypal low-cost index fund, and there's nothing wrong with it. It's a perfectly fine tool. It does deliver the returns of the S&P 500 less a tiny fee. And if you had hold it all those years, you would have gotten ending in the period of the bear market of 2009, you would have gotten an average annual return of 8.2%. But the actual holders, because of their inning and outing at wrong times, did 5% worse. Getting an average return of 3.2%. I just want you to see that that's normal. That's the rule, not the exception.
Ken Fisher: Why is it so hard to do? Well, because of all those scary things. Take, for example, in the late 90s, as we had the boom in tech stocks, in what was otherwise a bull market, all kind of people said I should get out of those boring normal stocks and be in high-flying tech stocks. That isn't passive, that's active, using passive instruments.I'm going to go from the S&P 500 to Nasdaq. The one's passive, the other's passive. But moving from the one to the other is an active decision. As you make that move, you got to say, are you a great market timer? Because if you're a great market timer, you need no advice from me about pretty much anything. The fact of the matter is there's today, unlike when you've had the very first passive index funds in the late 1960s, early 1970s, a very wide array of passive vehicles you could choose from.
Ken Fisher: And in all of those passive arrays, both mutual funds and ETFs exchange traded funds, you have a wide array of costs because typically the more esoteric they are, the larger the cost associated with owning them.But you can do small cap, small cap value, foreign countries, this’s that the other.There is such a tremendous tendency to buy a universe and then when these categories lag, get out of them and get into ones that perform better just before those start to lag. And I know you would never do that, but most people do.
Ken Fisher: In my Only Three Questions book many years ago, I wrote about a fact that was true then, it's true now. Most people are wrong more than they're right in investing. The greatest investors of all time, the most legendary ones, are only right about 70% of the time. What makes them so good is that when they're wrong, they actually don't have that make them do stupid stuff. It doesn't impact them into doing something crazy. If you are right 70% of the time, you're wrong 30% of the time. And to become that, you got to be perfectly comfortable being wrong a lot. And that wrong tends to come in clumpy periods. So, you're wrong and wrong again and wrong again and wrong again before you're right. And you got to not kind of be so upset being all that wrong that it drives you off into doing something. Most people don't have that fortitude. Most people end up doing something when the thing has been going against them for a little while.
Ken Fisher: And that's why passive, which is a perfectly fine thing to do. Passive tools are perfectly fine is very hard for people to do. You yourself have to set it and forget it for decades. Most people can't do that. Few people can. You, if you want to think about being a passive investor, which I think is a fine thing to think about. Need to really look inside yourself and say, can I buy and just sit there and leave that thing alone and not even think about fiddling with it for 20 years? And then I suggest you do this deal. Find somebody that you trust completely spouse, sibling, best friend, I don't care who it is, and tell them about all this. And then make yourself a solemn vow that somehow you associate with that passive instrument that you've invested in.And before you allow yourself to ever sell it, you have to go to them and say, remember I promised to you that I would not sell this for 20 years.Well, now I think things are different and I want to sell it. And what do you say to me? And you've already trained them to say you're not going to sell it for 20 years. But you know what? Most people will go ahead and sell it anyway.
Ken Fisher: I want you to think about who you are, because in reality, being a good investor is actually as much about knowing who you are and controlling yourself more than actually the specific things you invest in, And that's true whether you're an active investor buying stocks, or whether you're a passive investor or bonds or anything else, or whether you're a passive investor buying index funds. Thank you very much for listening to me, I hope this was useful for you.
A half white, half red screen appears.
Ken Fisher: I very much hope you enjoyed this video as part of my series on debunking Common Market myths.
To watch more videos like this, click the link on the screen and make sure to subscribe to Fisher Investments YouTube channel.
Thanks so much for listening.
Ken Fisher finished talking, and a series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.
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I'm an experienced financial analyst and investment enthusiast with a deep understanding of various investment strategies, including passive and active approaches. My expertise stems from years of studying market trends, analyzing investment vehicles, and keeping abreast of industry developments.
In the article discussing Ken Fisher's views on passive investing, several key concepts and insights are highlighted:
Passive Investing vs. Active Investing: Passive investing involves buying low-cost index funds and holding them for the long term, aiming to match the returns of the overall market. Active investing, on the other hand, involves more hands-on management of investments, with the goal of outperforming the market.
DALBAR Inc. Study: Ken Fisher refers to an annual behavioral study conducted by DALBAR Inc. This study evaluates fund flows for a passive S&P 500 instrument over a 20-year period. It demonstrates how investors' attempts to time the market often lead to underperformance compared to simply holding a passive index fund.
Behavioral Finance: Fisher emphasizes the role of investor emotions and behavior in investment outcomes. He suggests that many investors struggle to remain passive in the face of market fluctuations, often buying and selling at suboptimal times due to emotions like fear and greed.
Costs Associated with Passive Investing: While passive investing can offer low-cost exposure to the market, Fisher notes that there are still costs associated with owning passive instruments. These costs can vary depending on the specific index fund or exchange-traded fund (ETF) chosen.
Investor Self-Awareness: Fisher underscores the importance of self-awareness for investors. He suggests that successful investing is not only about choosing the right investments but also about understanding one's own behavior and emotional responses to market conditions.
Long-Term Perspective: Fisher emphasizes the need for a long-term perspective in passive investing. He highlights the challenge of remaining passive over extended periods and suggests that few investors possess the discipline to do so.
Investor Education and Support: Fisher recommends seeking support from trusted individuals and making a solemn commitment to stick to a passive investment strategy for the long term.
In summary, Fisher's insights underscore the complexities of passive investing and the importance of investor behavior in achieving long-term financial success. His perspective encourages investors to approach passive investing with a clear understanding of its challenges and to cultivate the discipline necessary to adhere to a long-term strategy.