“Pick a Great Game and Keep Your Butt in the Seat”

Behavior Matters

At Ark Advisors LLC we have been educating clients about the downfalls of hanging out with Retail Investors” for many years. Sometimes we forget how much protection we provide clients without ever thinking twice about it. Earlier this week I was reading an Investment News article about the number one family of retail funds by volume; American Funds. The article talks about the massive exit by retail investors of over 24 Billion dollars; that’s right Billion with a “B”. These mammoth actively managed funds that try to maintain high returns while investors bail is like an aircraft carrier attempting a U turn. We have been telling our clients for years that the mass population will normally do the wrong thing at the wrong time and sure enough here we go again. With over fifteen percent of the fund cashing out the managers are forced to hold extra cash and liquidate holdings they would like to hold. It always reflects in returns; as stated in the article Growth Fund of America has underperformed its group by over 5% for one year and underperformed its group by over 2% per year over three years. This is happening with several American Funds and other retail funds throughout the country. If you combine this with DFA funds out performing its groups by 1-3% you end up with a 3-8% spread on overall returns.
I compare this behavior with DFA investors and we find that the opposite is true. DFA investors are disciplined, diversified and behave as professional investors would. I can remember when I went to DFA training in Chicago and they used the hockey analogy to explain investment discipline. If you show up for the game fifteen minutes late (miss the first goal) and during a bathroom break (miss the second goal) and actually find yourself in your seat for the final goal; you are going to have a much different experience (outcome) than the person in front of you that happened to enjoy all three goals. We never want to be caught out of the market when a goal is scored and we never know when the next goal will be. If we pick disciplined low cost funds and diversify the risk, we should end up with a successful investment experience. Just think how many times you have witnessed fans leaving the stadium just in time to miss the greatest comeback in franchise history. These fans get stuck listening to the end of the game while stuck in their parking space.
This is the reason we use DFA funds within “The Cambridge Plan”. I can remember during 2007 and 2008 when the financial worlds were crumbling; inflows into DFA funds were positive. It’s like your parents always said “It’s who you hang out with that matters”. Remember; hang out with institutional investors and keep your butt in your seat.