The “Elephant” that Morningstar’s Latest Study Ignores

Like many financial behemoths that cannot take a position one way or another for fear of alienating a big chunk of their customer base (which helps Morningstar but hurts consumers) – Morningstar’s latest report covered in Financial Advisor magazine ignores a very important point – the “Elephant in the room”.  (By the way the magazine’s author also ignored the “Elephant” for the same reason as Morningstar.) As reported by Financial Advisors magazine author Christopher Robbins May 10, 2016, there is a perfect correlation to fund performance and the fund’s expense ratio. Robbins reported Morningstar’s results: “Across every asset category, including international equities and sector equities, the funds with the lowest expense ratios recorded the best performance over three, four and five-year time periods, and when comparing any two quintiles within a category, the lower-expense funds outperformed the more expensive ones without exception. Funds with lower expense ratios tend to have longer lifespans, according to Morningstar.” OK, so what’s the “Elephant”? Simple – index funds have the lowest expense ratios – far lower than conventional funds. So this report, for all practical purposes, is yet more proof that actively managed  or “conventional” funds under-perform index or “evidence-based” funds. Unfortunately, Morningstar does not want to take a position in the “conventional vs. evidence-based” debate – so their study did not address that specific issue. There are so many wonderful aspects about owning an completely independent RIA firm. One of my favorites: I can communicate completely candidly and with completely clarity on important topics without concern of offense. So hear this message: Dear Readers: I am looking into your eyes with the most sincere expression on my...

Lower Quarterly GDP & Subsequent Stock Market Moves

Does a report of low quarterly GDP results impact short term stock market returns going forward? Obviously GDP reports vary quarter to quarter and go through ebbs and flows – completely normal and expected. If a report is in the lowest quartile of results, how does that impact results? We just had one of those “low” reports April 28, 2016. (0.5%) An analysis of 68 years of data shows that stock market returns 3 months after the bottom quartile of GDP reports is announced do not differ significantly from the overall average. An executive summary of the results can be found...