I just saw a commercial today that essentially claimed, “When stocks go up you can sit back and relax but when stocks are volatile you really need an expert …” Well let’s see how that would have played out over this current market cycle. If there was ever a time to discover the “value added” help from the experts it would have been over the last 5 year stretch.

According to Standard and Poor’s most recent Index vs Active Fund Scorecard, more than 70% of all actively managed U.S. equity mutual funds (i.e., funds that select stocks in an effort to outperform a corresponding index of stocks) trailed their benchmarks for the five years ending 2008.

The new report shows that 71.9% of actively managed large-cap funds trailed the S&P 500; 75.9% of actively managed mid-cap funds trailed the S&P MidCap 400; and a stunning 85.5% of actively managed small-cap funds trailed the S&P SmallCap 600.

Actively managed funds also did poorly on a one-year view: 54% of large-cap funds trailed the S&P 500; 75% of mid-cap funds trailed the S&P MidCap 400; and 84% of small-cap funds trailed the S&P SmallCap 600.

International funds did just as poorly, on a one- and five-year basis. Sixty-three percent of global funds trailed the S&P Global 1200 on a five-year basis; 84% of international funds trailed the S&P 700; 59% of international small-cap funds trailed the S&P Developed Ex-US Small-Cap; and 90% of emerging market funds trailed the S&P/IFCI Composite.

“The belief that bear markets strongly favor active management is a myth,” said Srikant Dash, global head of Research & Design at Standard & Poor’s.

It would be nice if we could require commercials making superior investment claims show the above information.

Sometimes there are no words. This is both sad and humorous. It is a serious clip on Good Morning America discussing how investors are seeking clarity in the current environment.

This is the end result of wanting to cling to certainty in a market environment that really only compensates investors for taking on the risk of uncertainty.

There is no magical skill set that allows investors to know what is going to happen next and those that claim to provide it seem to be somewhat foolish or simply charlatans. I’ll let you decide where to categorize the following:

How far will investors go to seek certainty and who will line up to provide this? Click here.

Many times stepping back and getting a fresh perspective on a consistent theme makes all the difference.

Six months after his first comprehensive survey of the market downturn, Weston Wellington returns to the topic with a multi-part series on what investors should consider as they move forward. The videos include an examination of capital markets, the effects of recession and government policy on stock prices, how the current market stacks up to previous downturns, and the reasons why our core beliefs have not changed in light of these events.

I strongly encourage everyone to watch. Having a strong foundation of our investment view helps reinforce the appropriateness and effectiveness of your investment strategy during these volatile times.

Click below for presentation.

Our approach under adverse business conditions.

Despite a tumultuous start, the month of March was one of the top 5 best months for many of the funds noted below.  But, this is just part of the story.  Equally interesting, had the monthly returns stopped on March 9^th, many of the same funds would have experienced top 10 worst monthly performances in their live history.

One of my first reactions to the recent market rise, its highest since October 1992, was to think of those in the investing public that had recently reduced their exposure to stocks. The results of the last few weeks of March will not make anyone “right” or “wrong” as there are sensible reasons for investors to become more risk averse, just as there are reasons to become more risk tolerant.

We may very well experience further declines, or we may be in the midst of a market upturn. I would not attempt to predict either. These past weeks serve as a much needed reminder that we should not allow ourselves to get caught up in the fear gripping investors.

As advisors, we are subject to the same behavioral biases that affect all types of investors. We have not somehow immunized ourselves from these emotions, nor have we been brainwashed into behaving rationally. We simply have confidence in our message and know, that a disciplined, diversified, low cost approach offers the best probability of long-term financial success.

Link to Data disclosures: DFA Funds

I recently posted an entry, Endowment View, that contained an Interview with David Swensen, the Chief Investment Officer for Yale’s endowment. Shortly after the blog entry, a friend of the firm sent us this recent interview from Yale’s Alumni Magazine, March/April 2009. Click here for the link to the entire interview or see below excerpts that I have selected that pertain to our own investment philosophy.

As a quick review, David Swensen is widely considered the most successful Chief Investment Officer for a university endowment. I feel his comments are very relevant for our clients because, his main objective is to position the fund to be able to provide continuous distributions to manage Yale’s ongoing expenses in perpetuity.

As the article points out, when he began managing the endowment, investment returns provided $446 million in support, or about 10 percent of the university’s operating budget. This year, the endowment is providing $1.15 billion, which is nearly 45 percent of the budget.

Our approach to managing clients’ objectives is similar. our clients need to use their portfolio to fund future objectives. Although these objectives vary by client preferences, time horizons, and general usage, the underlying commonality is that assets will eventually be distributed.

The excerpts:

Y: … Given all the turmoil and uncertainty, what should individual investors do?

S: … With all assets, I recommend that people invest in index funds because they’re transparent, understandable, and low-cost… But I also recommend that investors rebalance. Rebalancing is even more important amidst these huge declines in the stock market because it presents a great opportunity.

Y: … Explain this idea of assets allocation, please.

S: … Asset allocation is the tool that you use to determine the risk and return characteristics of  your portfolio. It’s overwhelmingly important in terms of the results you achieve. In fact, studies show that asset allocation is responsible for more than 100 percent of the positive returns generated by investors.

Y: … How can that be?

S: … It’s because the other two factors, security selection and market timing, are a net negative. That’s not surprising. They’re what economists would call zero-sum games. If somebody wins by buying Microsoft, then there has to be a loser on the other side who sold Microsoft. If it were free to trade Microsoft, the amount by which the winner wins would equal the amount by which the loser loses. But it’s not free. It costs money. It costs money in the form of market impact and commissions if you’re trading for your own account, and it costs money in terms of paying fancy fees if you are relying upon an investment advisor or mutual fund to make these security-specific decisions. For the community as a whole, all those fees are a drag on returns.

That’s why the most sensible approach is to come up with specific asset allocation targets that you can implement with low-cost, passively managed index funds and rebalance regularly. You’ll end up beating the overwhelming majority of participants in the financial markets.

Y: … Maybe we need language, David. No one wants to be in the “passive” group.

S: … No, they don’t. The basic problem is, it’s boring. The approach that I recommend is going to give you absolutely nothing to talk about at a cocktail party. You’re going to be in a corner by yourself, and no one will pay attention to  you. But you’ll end up with a better-funded retirement.

Y: … Unconventional Success delivered a scathing review of the mutual fund industry. You rightly pointed out that the vast majority of mutual funds charge high fees, trade too frequently, and under-perform the markets. How did the industry react?

Y: … I’ve heard stories of people in the fund management business being irate about the book. That’s not surprising. The mutual fund industry is not an investment management industry. It’s a market industry. And if somebody interferes with your marketing, you’re not going to like that. So I was pleased to hear that there were senior people in the industry who were very, very unhappy with me and my book.

Y: … I was hoping you’d mention Cramer. In the new edition of Pioneering Portfolio Management, you write: “Education at Harvard College and Harvard Law School, Cramer squanders his extraordinary credentials and shamelessly promotes stunningly inappropriate investment advice to an all-too-gullible audience.

S: … Jim Cramer exemplifies everything that’s wrong with the advice - and I put advice in quotation marks - - that is given to individual investors. Investing is a serious business. We’re talking about retirement security for American citizens, and he turns it into a game. It’s a games where his listeners lose. It’s ridiculous. These high-turnover, rapid trading strategies enrich the brokers. If you look at Jim Cramer’s approach on an after-fee, after-tax basis, the individual doesn’t have a chance.