A Journey to the Past for Advice in the Present

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“The evidence that can be cited, however, indicates that the average return from professional advice and continued supervision is very low. In many cases it is zero or negative; in other words, investment companies as a whole have not outperformed representative stock averages which could form the basis of an ‘unmanaged’ portfolio.” – The Case for an Unmanaged Investment Company, 1960

Let’s travel back 55 years into the past and see what the world was like. It was the early-1960s, where our country was still riding the coattails of a post-war economic and population boom. President John F. Kennedy would be elected into office, the United States would first send troops to fight the war in Vietnam, Muhammad Ali (formerly known as Cassius Clay) would win his first professional fight, The Flintstones premiered on television for the first time, and the Chevrolet Corvair was Motor Trend’s “Car of the Year.” In terms of more tangible numbers, the average cost of a new house was $12,700, the minimum wage was at $1.00 per hour, and the average cost for a gallon of gasoline was $0.25[1].

Within the wide world of finance, the largest corporations within the United States were General Motors, Ford Motor, Exxon Mobil, Standard Oil of New Jersey, Chrysler, US Steel, and Texaco[2] and the US stock market would finally regain their pre-Crash level in real terms[3]. There was also the beginning of a shift in the world of money management. Institutions, rather than individuals, began taking on the majority of the overall load and trading activity.

Now we are no longer able to enjoy the Chevy Corvair, but there is one piece of advice that has stood the test of time.

In The Case for an Unmanaged Investment Company by Edward F. Renshaw and Paul J. Feldstein, the authors examined the evidence that had been produced up until 1960 in terms of professional investment management and their performance. Originally published in January/February 1960 edition of the Financial Analysts Journal, their paper was ahead of its time in calling for an “unmanaged investment company,” which would later become what we know today as an “index fund.” We believe it to be the first publication to suggest the creation of an index fund. Surprisingly, it would take over a decade after the publication of the study for the first index fund to be launched (1973).

The paper accurately describes the change in the investment landscape after the enactment of the Investment Adviser Act of 1940. In 1940, there was a total of $448 million invested in open-ended funds. This had subsequently ballooned into over $8.7 billion by 1953 with institutions taking over the majority of the investing versus individuals.

Citing studies from both regulators and academics, the authors painted a very grim reality of active professional investment management since the early 1920’s. The Securities and Exchange Commission (SEC) investigated the performance of investment companies versus that of common stock indexes from the years 1927 to 1937 and found “no significant difference between the performance of investment companies and that of the common stock index.” This was at a time where computers did not exist to allow for the almost instantaneous and cheap access to information across the masses.

Similar to the SEC’s investigation into the performance, the American Institute for Economic Research compared the performance of a large number of leading investment companies with Moody’s 125 stock average from 1920-1958 (39 year period), and concluded that, “it does not appear that the performance of investment company stocks has been superior to the representative average.”

Even more telling was Arthur Wiesenberger’s inspection of investment company performance versus that of the Dow Jones Industrial Average from 1947-1956. Mr. Wiesenberger’s analysis concluded that from the period 1947 to 1956 “an investor would have been better off on the average to have invested in a company following the DJI (Dow Jones Industrial) than to have picked an investment company at random.

Sound familiar?

If you have been following Index Fund Advisors, you have probably come across similar studies over different time periods that come to the same exact conclusions. For example, Eugene Fama and Ken French found similar results as Arthur Wiesenberger in their 2007 paper Luck versus Skill in the Cross Section of Mutual Fund Returns. Similar results: 50 years apart.

Now let us humor you for a second. If there in fact had been a more accelerated adoption of the very profound idea of an “unmanaged investment company” back in 1960, what does that mean in actual dollars? Well, let’s just take a look at a few different IFA Index Portfolios between 1960 and 2014. Let’s assume an initial investment of $10,000 with no additions. What would things look like? The table below displays the results net of IFA's advisory fee.

Growth of $10,000
55 Years (1/1/1960 to 12/31/2014)
Portfolio Growth of $10,000
IFA Index Portfolio 100 $6,811,583
IFA Index Portfolio 80 $3,781,140
IFA Index Portfolio 60 $1,921,140
IFA Index Portfolio 40 $896,839
IFA Index Portfolio 20 $385,595

If someone for example had $10,000 that they initially invested in an IFA Index Portfolio 60 back in 1960, they would have had a balance of $1,921,140 in their account today. Using an annual 5% of account balance withdrawal rule, this equates to roughly a $96,057 standard of living today.

Not bad at all!

Today, the minimum wage is $7.25, the median cost of a home in the United States is $188,900[4], and the biggest companies in the world include Apple, Google, and Microsoft[5]. But one thing has stood the test of time: the benefits of a passive approach to investing. The early evidence found in the first half of the 20th Century all of the way up to today has continued to lead to the same conclusions. For investors, in practical terms, it can have very powerful implications for meeting their long-term objectives.

Let the market work for you!