Can you afford to be an ostrich?

OK, the belief that ostriches bury their heads in the sand, believing they become invisible, is patently untrue. However, that myth carries a great deal of relevance in our current investment landscape. Passive investing has been lauded as the ultimate strategy to weather the market over the long term. The thought of being able to beat the market is ridiculed as being as silly as…well, as an ostrich sticking its head in the ground. We would argue that if that were true, why has Warren Buffet been able to navigate markets so successfully for generations? Luck?

While passive investing is a viable approach to markets in certain instances, other market conditions, which can last for years, may turn it into a sub-optimal approach for your clients. Since the 2009 lows, a passive strategy has been a good option because the multitude of factors that have the potential to impact stock prices are muted. In that environment, investor expectations about real growth is the significant driver when inflation and credit spreads are well-behaved. Therefore, sticking your head in the sand and ignoring other stock market drivers will not hurt your clients when those other drivers only cause minimal volatility to your portfolio.

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However, times have changed. Default risk is no longer insignificant, nor is inflation, so it is best to take a page from John Maynard Keynes and change when the facts change. The new reality is that you are going to deal with rapidly changing stock leadership for at least a few years, and that is when the benefits of passive investing become significant liabilities as new sectors and stocks start outperforming.

This dynamic could become further exacerbated by outflows from passive funds. For over a decade, investors have enjoyed the artificial boost passive investing offers during bull markets because flows into passive funds disproportionately raise the stock price of the largest market cap stocks carrying valuation premiums. As this trend reverses, it will have the inverse effect, disproportionately hurting the stocks it used to help. 

When the logjam breaks and a myriad of factors begin to impact stock prices, it maycan be time to adopt an approach that tracks stock price sensitivity to each of those factors. Pave ranks these factors’ influence on stock price changes and positions the portfolio to take advantage of shifting capital flows.

Passive investors, it could be time to pull your head out of the sand because the myth of passivity as the ultimate investing strategy is becoming just that.

To learn more, please reach out by emailing sales@pavefinance.com or pressing the button below. We look forward to speaking with you.

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1. Testimonial provided by Dre Griggs in August of 2023. Dre is not a current client of Pave Finance, Inc. (“Pave”) or any of Pave’s affiliated entities. Dre is an Independent investment adviser with $300 million in AUM.  No compensation was provided in exchange for this testimonial.

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