Why Bother With Active?

National Geographic makes a provocative claim about longevity on one of its recent covers:

national geographic may 13 600x375 Why Bother With Active?

Our genes harbor many secrets to a long and healthy life.  And now scientists are beginning to uncover them.

While it might be a stretch that life expectancy in the US will be approaching 120 any time soon, what is not a stretch is that life expectancy continues to increase.  Among many other aspects of increased longevity, the financial implications of being a good investor are becoming more pronounced.

To illustrate, consider a simple example.  Suppose that when the baby on the cover of the magazine graduates from high school at age 18 he decides to take a summer job selling alarm systems door-to-door.  This boy is a very good salesman, and is able to pull in $100,000 before he heads off to college.  He decides to take that sum of money and invest it in the stock market.  Suppose that this boy ends up never needing to use that money and so throughout his very long life that money just stays invested and is able to earn 9 percent a year.  Compare that return to a different person who, over the same time frame, invests $100,000 and earns only 6 percent a year.

Table 1 Why Bother With Active?

With this simple example, it becomes easy to see how greater longevity can have an outsized reward for those investors who are able to generate even a couple percent excess return over time.  After only 10 years of investment results, the investor earning 9 percent a year only has 1.3 times more money than the investor earning 6 percent.  However, after 100 years there is an enormous difference of 16.3 more money.

Something to think about next time you hear someone say that it is not worth it to try to find an active strategy that is able to generate a couple percent in annual excess return over time.

This example is presented for illustrative purposes only and does not represent a past recommendation.  A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

8 Responses to Why Bother With Active?

  1. […] Why returns matter: increasing longevity.  (Systematic Relative Strength) […]

  2. AmericanFool says:

    Sure, it’s worth chasing if it can be reliably obtained, I am not sure anyone ever argued to the contrary. The issue is that it’s rare indeed to find money managers who do that consistently. Additionally, for the few who seem to be able to do this, you will pay quite a bit more in fees, in many cases eating up all of your excess returns (I am thinking here of American Funds who can claim alpha of perhaps a % or two, but charge enough in fees that it takes at least 20 years make up for those high fees. I don’t have that kind of faith. Over 20 years, investing on my own, my annual avg rate of return is 10.3%. That’s in a 401K, & it’s Index Fund based… those returns are a little higher than it should be, reflecting some risks taken and (lucky? smart? random?)investment ideas I’ve had. I’m far from convinced that I could have done better with professional management, or outside of the Index funds that form the core of my investment approach.

  3. John Butters says:

    This has become the fashionable argument for active management and tactical asset allocation. “But if we could do it, wouldn’t it be great!” Not very convincing.

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