Index or Try to Do Better

Gospel, noun –  gos·​pel, ˈgä-spəl

Something accepted or promoted as infallible truth or as a guiding principle or doctrine.

In the investment world, one belief that many people feel is infallible is that trying to beat the market is fruitless. Here is the gospel preached from the investment-media pulpit:

• Forbes: “Most managers fall behind their benchmarks in any given year, and only 1% do better over any 5-year period. A better choice is an index fund.”¹
• Dow Jones MarketWatch: “Beating the benchmark is very difficult – and especially difficult over time,” said Anu Ganti, U.S. index investment strategist at S&P Dow Jones.²
• Morningstar: “Over the trailing 5 years, just 30% of large-cap managers beat their average benchmark return.”³

The “experts” tell you to just give up, buy a cheap index fund, and be happy with an average return. Statistically, the longer you invest, the less likely it is you’ll beat the index. Apparently, that’s true, but we don’t buy into this dogma. It goes against our principles to ‘not even try to win.’ Of course, nobody beats their benchmark all the time; nobody bats 1,000 (Bernie Madoff claimed to), but to not even try seems almost un-American. I mean, who celebrates being average?

Folks celebrate the index fund because it’s cheap and will likely beat most managers. Let’s compare the fact that some percentage (usually about 30%) of managers beat their index in any given year to the Indy 500, a 200-lap race.

Thirty-three cars start the race, the “index car” being one of them. And since usually 30% of the cars beat the index car, year-after-year it averages finishing in 11^th place. The owner of the index car spends the least money, never wins, averages the 11^th place finish, and the press love it! They celebrate the fact that the index car owner spends peanuts and beats 22 high-priced entrants every year. Over its career, the index car has one of the highest average finishes, even though it never won, and nearly never finished in the top ten. Analysts gush over the index, “Look how dumb those 22 car owners are for spending so much and not beating the index car!”

Instead of accepting average, we try to win. We never give up and always try to improve the odds of beating our index. We are more like a guy named Ralph DePalma. In the 1912 Indianapolis 500, Ralph DePalma drove a Mercedes and led every lap for 196 laps; he had just 10 miles to go. He was over 12 miles ahead of the second place car and then his engine started failing. Still in the lead he limped along, but the car finally stopped with 3 miles left. Knowing that prize money was only paid to the top-ten finishers, Ralph and his riding mechanic started pushing the broken hulk for the last 3 miles.

DePalma won the hearts of the fans, but finished 11^th—out of the money. DePalma refused to give up and was eventually rewarded as he won the race 3 years later. Like DePalma, we try to win. Watch this year’s Indy 500 on Sunday, May 26^th on NBC.

Dave S. Gilreath, a certified financial planner, is a 40-year veteran of the financial services industry. He established Sheaff Brock Investment Advisors LLC, a portfolio management company based in Indianapolis, with partner Ron Brock in 2001. The firm manages more than $1 billion in assets nationwide. Sheaff Brock is part owner of SBAuer Funds LLC, manager of AUERX.

Investing involves risk, including the possible loss of principal. You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses of the Fund before investing. The Fund’s prospectus contains this and other information about the Fund, and should be read carefully before investing. You may obtain a current copy of the Fund’s prospectus by calling 888-711-2837.

AUERX is distributed by Ultimus Fund Distributors, LLC. SBAuer Funds, LLC and Ultimus Fund Distributors, LLC are not affiliated.

1. Raul Elizalde, “Active Equity Funds Consistently Lag The S&P 500. Choose This Instead,” Forbes, March 8, 2024, https://www.forbes.com/sites/raulelizalde/2024/03/08/active-equity-funds-consistently-underperform-the-sp-500-choose-this-instead/?sh=cf792a531e3c
2. Christine Idzelis, “For the 14^th year in a row, the S&P 500 did better than the majority of actively managed U.S> large-cap stock funds,” Morningstar, March 6, 2024, https://www.morningstar.com/news/marketwatch/20240306263/for-the-14th-year-in-a-row-the-sp-500-did-better-than-the-majority-of-actively-managed-us-large-cap-stock-funds
3. Bryan Armour, Ryan Jackson, and Dimitar Boyadzhiev, “Morningstar’s US Active/Passive Barometer – Year-End 2023,” Morningstar, 2024.