Summer Report Card: Active Fund Managers Demonstrate Bad Timing

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 soar away 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.

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The information presented is for educational purposes only and should not be considered personalized investment, tax, or legal advice.