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Summer Report Card: Active Fund Managers Demonstrate Bad Timing – Presented by Mark K. Lund, Financial Advisor in Utah

You’re driving down the interstate. Traffic is heavy and you’re running late. You get in the left lane, which is supposed to move faster. But for some reason it comes to a stop. So you dodge over to the right lane, which also stops. Now the left lane is moving again. So you signal to get back over—if someone would just let you in.

Frequent lane changing is a risky habit. Around 3% of all fatal crashes in the U.S. involve changing lanes or merging.1

But at least it’ll get you where you’re going sooner, right? Not so fast, say the people who study traffic flow.

Gary Davis, a civil engineering professor at the University of Minnesota, has found that when driving in heavy traffic, frequently changing lanes does not significantly affect the average speed of a car.

It just feels like you’re going faster.

The reason is that it’s difficult to judge the actual speed of traffic around us. “If you’re in heavy traffic,” he says, “it’s really hard for an individual to determine which lane is faster.”

Part of this is due to a limited window of perception (we pay more attention to the speed of traffic around us when we’re stopped), and part can be chalked up to what researchers call “lane envy”—the feeling we get when the cars beside us are moving and we’re not.

When you’re not making short-term progress, getting over into the next lane at least feels like you’re “doing something.”

The same psychology seemed to affect professional investors during this past summer’s volatility. In June, rate hikes by the Federal Reserve in response to inflation caused a dramatic sell-off in stocks.

According to the Financial Times, many active fund managers hoped to stem their short-term losses by fleeing into the “safe harbor” of cash.2 Unfortunately, having their money out of the market caused them to miss the dramatic recovery of the next few weeks.

Bank of America reported that “despite the super soaraway last month, only 28 percent of active fund managers focusing on big stocks beat their Russell 1000 benchmarks.”

In other words, if someone invested in a fund that tracked the Russell 1000 index and did absolutely nothing, they would have beaten nearly three quarters of active managers who specialize in that market sector.

Like frequent lane changes, frequent investment trades come with risks and potential costs.

With volatility continuing this year, even the most disciplined retirement savers have wondered about “changing lanes” to assets that appear to be doing better in the short-term. But just like someone who finds themselves stuck in traffic, just “doing something” is rarely productive. In both cases the most prudent action is patience with a view to the long-term.

If you ever have any questions about your investments or retirement plans, please feel free to give me a call at 801-545-0696.

Regards,
Mark Lund
Stonecreek Wealth Advisors, Inc., A Financial Advisor in Utah
11576 S State Street, Bldg. 1002
Draper, UT 84020

Sources:
1. http://go.pardot.com/e/91522/s-while-driving-save-you-time-/85v592/1675703584?h=OGyrZD6D-vHomZurK5gt6XiW9eH8iY13jMV8jQngD2I
2. http://go.pardot.com/e/91522/02-f899-4c28-b670-82d46ad18746/85v595/1675703584?h=OGyrZD6D-vHomZurK5gt6XiW9eH8iY13jMV8jQngD2I

This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by Efficient Advisors, LLC (“EA’) for Mark Lund, Mark is a Financial Advisor in Utah. He is known as a Wealth Advisor, The 401k Advisor, Investor Coach, Financial Planner, Investment Advisor and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. a fiduciary, independent, fee-only, Registered Investment Advisor firm providing investment management and retirement planning for individuals and 401k consulting for small businesses. Mark’s newsletter is called The Effective Investor Newsletter. Cities served in Utah are: Salt Lake City, Salt Lake County, Utah County, Park City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, American Fork City. The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.

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