“Active funds and strategies are underperforming passive indices recently. And they’re cheaper too. Why not move my money to a passive strategy?” 

Response by: Joe Merkle, Client Advisor

Passive index funds have generated strong returns in recent years; in real value and even more so in relative value against their active counterparts. Keep in mind; these funds are simply designed to mirror an index. They require less analysis and trading, and as a result are less expensive. Since March 2009 (6+ years ago), they have generally moved in one direction…up.

It is human nature to believe what has happened most recently will continue to happen. This recency bias is extremely dangerous for investors. In working with clients, I’ve urged them to read an informative piece on dangerous investor behavior by Kate Ashford: 7 Brain Biases That Could Affect Your Investing Strategy-

Since our founding over 25 years ago, our philosophy remains the same: it is through a combination of growth participation and the avoidance of catastrophic losses that we can achieve superior performance. Our disciplined, process-oriented buy and sell strategies put us in position to protect our clients against those catastrophic, life-altering declines, even though it doesn’t feel good, or even right, during these high-octane bull market runs.

“China equities have dropped more than 20% in the last 3 months. Is that cause for concern in the U.S. and other international markets?”

Response by: Patrick Jamin, Chief Investment Officer 

This is a great question that can be answered in a couple of ways. The answer can also be applied to similar macro-related events shaping the world economy today (Greece debt crisis, Russia-Ukraine conflict, etc.).

In recent years, the correlation between U.S. and Chinese equity markets has been quite low. From the fourth quarter of last year through mid-June of this year, Chinese equities rallied 117%+while the S&P 500 was +7%. During the recent decline, Chinese equities were -23% while the S&P gained +0.5%. Perhaps more importantly, market returns and economic growth do not move in tandem. U.S. GDP has grown at a stable (if not somewhat disappointing) 3% over the last 5 years while the stock market has nearly doubled. China’s economy is slowing down, but central government and banking measures may keep market returns in positive territory. The growth in the U.S. market has shown us just how impactful these accommodative measures can be. The central focus should be analyzing the data (not the noise!) and determining what this tells us about future returns.

NorthCoast has very little exposure to China in our global and international strategies (CAN SLIM® International = 7% Chinese stocks as of 7/31/15). As always, we continue to monitor all global events and trends and will make adjustments when necessary.

“What sources do you follow to stay current with market news?”

Response by: Jack Killea, Client Advisor 

There are seemingly an infinite number of places to digest financial news—it could be the industry titans (WSJ, Bloomberg, IBD) or the new kids on the block (MarketWatch, or even Twitter). Even within NorthCoast, the employees consult a wide variety of sources. No matter where you decide to get your information, it’s crucial to keep in mind two major flaws of financial journalism: first, like any other business, media outlets are incentivized to get your attention, not tell you the truth; and second, these sources often exacerbate our tendency for hindsight bias.

In the end, every media outlet is a business—though many adhere to the facts, the way in which those facts are framed can often be extreme. We live in a world of 24/7 news, and even if reporters need to grasp at straws, they may create a reaction even when it’s relatively unfounded or unnecessary. We believe this has a particularly negative effect on retail investors, whose emotions and opinions can lead to irrational decision-making.

Every day at 4:05 PM ET when you refresh your web browser, you’ll find some version of this headline: “US Markets Rise/Fall on Hopes/Fears of (fill in good/bad news)”. Especially in the age of Quantitative Easing, when bad news sometimes means good news and vice versa, it’s quite difficult to determine exactly why a market is moving in a certain direction on an intraday basis. As humans, we are hard-wired to conveniently organize our world by providing a narrative for any change. The truth is, financial markets are incredibly complex—though we can analyze market data to make responsible investment decisions, it’s much more difficult to boil down every market move into a simple and concise “cause & effect”. More often than not, hundreds of factors are colliding at once, and the outcome is the market return. This is why we focus on disciplined and data-driven investing. Market news is terrific for conversation, but it requires absolutely no foresight, and therefore shouldn’t be used to guide any portfolio.