Have you ever heard of the SPIVA® Scorecard? Published by the S&P Dow Jones Indices, it’s a report comparing the performance of active vs. index investing. As today’s No Dumb Question, I’ll take a closer look at this important report, so you can see why I want to rename it the “I Told You So” scorecard!

You know how I often mention that active investing (such as stock-picking, market-timing, and other tactics designed to beat markets returns) typically costs more and delivers less than the broad market has to offer investors? The latest SPIVA® Canada Scorecard has been released, and it’s given me fresh ammunition on just how true that remains.

 

Active vs. Passive Terminology

First, let’s get a few things clear.

  1. SPIVA stands for “S&P Indices vs. Active.” In other words, it compares the outcomes of active vs. passive index investing. The SPIVA Scorecard has been comparing active managers against index returns for the past 16 years.
  2. Active investing is when someone – such as an investment guru, or your neighbour with a hot stock tip – promises to deliver outsized returns by outsmarting the market as a whole.
  3. Indexes are benchmarks that reflect broad market returns. If you invest in a fund that tracks an index, there’s no trying to predict the future. You just own, and earn the returns delivered by the market that the index is tracking (after expenses).

Which strategy is better for investors? That’s what the SPIVA report is designed to answer. And basically, it’s told us for many years that none of the active investing strategies are expected to pan out once the numbers are in. Instead, all evidence suggests you’re hitching your financial success to a fantasy if you entrust your money to an active approach.

 

SPIVA Canada Results to Date

To illustrate, let’s take a look at the most recent SPIVA Canada Scorecard, through year-end 2018.

After decent returns for most of 2018, a December stumble abruptly wiped out most or all of the year’s returns, at least temporarily. No wonder the SPIVA scorecard described 2018 as “topsy-turvy” for global and Canadian stock markets alike.

2018 also should have been a prime time for active managers to shine. While we index investors are supposed to simply sit tight with our existing plans, active managers are supposed to help you do better than that. They’re supposed to see the declines coming, and get you out before the big drops. Then they’re supposed to get you back in, so you don’t miss out on the recovery when it arrives.

Suffice it to say, that’s not what happened at year-end 2018. Instead, the SPIVA Scorecard found (emphasis ours), “more than 75% of Canadian active equity managers underperformed their index benchmarks across all categories in 2018.”

So much for saving you during troubled times.

But maybe 2018 was unusual for active managers. What if we extend our active-vs.-passive comparison to the 10 years ending 2018? Actually, the numbers are worse:

  • A full 91% of active funds underperformed what the Canadian/U.S. stock markets would have delivered to you anyway during that decade. All you had to do was take a passive approach. This would almost certainly have also incurred far less cost.
  • More than 95% of the actively managed international funds fell short of their index as well. That’s even worse than the domestic comparison.

 

The Power of Passive Investing

Are you already a passive investor, using low-cost index funds to participate in the markets? If so, good for you! You’ve probably already forgotten there was even much of a speed bump back in 2018. Meanwhile, some active strategists may still be sitting on the sidelines, wondering when the markets will seem stable enough to reinvest in. Even worse, active investors have likely been paying extra fees for the “privilege” of missing out on 2019’s year-to-date returns.Fortunately, it’s never too late to shift gears. The truth is, the near-term market outlook almost always feels unstable; we never know what a month or year might bring. But over the long haul, the future looks solid for index investing. If you’re still trying to win with an active approach, I encourage you to make the switch today. Then, I’ll see you back here for my next No Dumb Question.