Processing information is mankind’s Kryptonite.
We base our opinions on how things make us feel. Sentiment affirms or denies the claim.
This process is the antithesis of objective reasoning. The proper way to discern information is to stay in touch with what is, whether you like it or not.
We see these cognitive errors in all types of fields. It’s especially prevalent when touching the third rail of emotions – politics.
Look at this chart to see how Republicans and Democrats view the economy, their feelings Trump (no pun intended), all economic data.
The massive gap between Republicans and Democrats regarding the trajectory of their household finances is sentiment, not data-driven.
Hope is not a strategy.
Investors fall for the same trap. Hedge and actively managed stock funds routinely underperform the plain vanilla S&P 500 index.
Numbers don’t lie.
My colleague, Barry Ritholtz presents a damning case on Active Large Cap Underperformance.
Sometimes, the data is so overwhelming that little commentary is needed.
From SPIVA, here is the data on large-cap fund performance in the United States, showing the percentage of all large-cap funds that over- and underperformed the S&P 500 over various time frames:
1 Year: 65.24% of funds underperformed the S&P 500; 34.76% outperformed the S&P 500
3 Years: 84.96% underperformed; 15.04% outperformed
5 Years: 76.26% underperformed; 23.74% outperformed
10 Years: 84.34% underperformed; 15.66% outperformed
15 Years: 89.50% underperformed; 10.50% outperformed
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Legions of silver-tongued and conflicted salespeople salivate at taking advantage of our reasoning deficiencies and push all the right buttons to make investors make poor decisions about their money. Due to unnecessary fees and poor performance, investors wind up with hundreds of thousands of dollars less in their retirement accounts.
Though it’s nice to have faith in things that make us feel good.
Always remember, faith doesn’t pay the bills.
