Episode 15: Don't Play the Losers Game

​

Welcome to the Retire Ready podcast, the podcast that helps Canadians prepare for all that retirement brings. I'm your host, Scott Sather, Founder, President, and Financial Planner at Awaken Wealth Management, and Portfolio Manager with Awaken Investments of Aligned Capital Partners in Regina, Saskatchewan.

Thanks for joining me today. This is part two of our series on the investment philosophy we use at Awaken Wealth. In the last episode, we talked about how markets worked and how millions of buyers and sellers help determine prices. But that leaves us with a pretty important question. If all these smart professional investors are competing to find the best opportunities, how many of them actually beat the market?

Before we get to that, let's talk tennis. Yes, tennis. And no, you don't have to play to follow along. Years ago, an American physicist, engineer, and businessman named Simon Ramo looked at what was happening in tennis matches from an engineering and statistical lens.

He noticed something interesting. At the professional level, players tend to win points by hitting shots their opponents can't return. But with amateur players, it's usually the other way around. Points are more often lost through mistakes, hitting the ball into the net, serving a double fault, or sending it out of bounds.

So for the weekend tennis player, you often win by keeping the ball in play and letting the other person make the mistake. In 1975, an investment consultant named Charles Ellis took that idea and applied it to investing. He wrote an article called The Loser's Game, which later became the basis for his book, Winning the Loser's Game.

His argument was that professional investing had changed. Years earlier, investment professionals were often competing against individual investors who didn't have the same information or resources. But as more professionals entered the market, they were increasingly competing with each other, people with access to the same information, plenty of research, and a whole lot of experience.

That doesn't mean those professionals aren't good at what they do. Quite the opposite. They're so good, and there's so much competition, that it's incredibly difficult for any one of them to consistently come out ahead. And that brings us to Ellis' point. Maybe the best way to win isn't to hit the perfect shot. Maybe it's to avoid the mistakes that can cost you the match.

Okay, so how does that apply to investing? In nineteen ninety-one, economist William Sharpe wrote a short paper called The Arithmetic of Active Management. The idea is actually pretty simple, even if the title doesn't sound like it. Think about all the investors who own shares in a particular stock market.

Some hold the market through a broadly diversified index strategy. Others are active investors trying to select the right stocks, buy or sell at the right time, and do better than the market. Before costs, the active investors, taken together as a whole, must earn the market's return. If one active investor does better, another active investor has to do worse.

Across the group, they can't all beat the market they're collectively invested in. Then the bills arrive. Trading costs, research expenses, management fees, all of those take something away from what investors actually keep.

And on average, active management tends to cost more. So here's the challenge. Before an active manager can give you a better result than a low-cost index fund, they have to overcome that additional cost every single year. Let's put that into Canadian dollars. According to PWL Capital's 2025 year-end research paper, the passive versus active fund monitor, the asset-weighted average management expense ratio, or MER, was about 0.29% for passive funds and 1.28% for active funds in Canada.

Now, on a $500,000 portfolio, that's roughly $1,450 per year versus $6,400. That's almost five thousand dollars a year in additional fund costs. And remember, you pay those costs whether your investments go up or down.

Now, I should point out that these are the fund or product costs, not necessarily your total cost of investing or the cost of financial advice. And I'm not saying advice doesn't have value. We've talked about the value of financial planning, tax decisions, and helping people avoid costly mistakes previously. But paying more for an investment fund isn't by itself a reason to expect a higher return.

All right, so that's the math. But what happens in the real world? We have some pretty good Canadian evidence. S&P Dow Jones Indices publishes a report semi-annually called the SPIVA report, which is short for S&P Indices versus Active.

It compares actively managed funds with appropriate market indexes and includes funds that have closed or merged along the way. And that last part matters, and I'll come back to it later. According to the 2025 year-end Canadian scorecard, over the previous 10 years, 98.8% of Canadian equity funds underperformed the S&P/TSX Composite Index.

Now let that sink in for a moment. If you started with a hundred Canadian equity funds, only about one in that group would have outperformed the index over that decade. Now, look at just 2025. The Canadian stock market, as measured by S&P/TSX Composite Index, returned about 31.7%.

The average Canadian equity fund returned about 22.1%. That's a difference of almost ten percentage points in a single year. Of course, I'm not suggesting every portfolio should be a hundred percent Canadian stocks or that every fund holds exactly the same investments as its benchmark.

That's not the point. The point is how hard it has been for active managers as a group to keep up with the market they're trying to beat. And here's one more number I think that is worth knowing. Over that same ten-year period, 47.1% of Canadian equity funds were merged into another fund or liquidated.

Almost half. What does that matter? Because when you see a fund company's list of successful ten-year track records, you may only be seeing the survivors. The funds that didn't do so well might not be around to show you their results. That's called survivorship bias. Now, when we talk about that report, it does include a few other fund categories as well, including the US and international funds in Canada. And over the last 10 years, 97.1% of US equity funds and 98.7% of international equity funds also underperformed their respective index. You can find a copy of the report in the show notes for today's episode. Make sure you stick around to the end to find out where to find them.

Now, before anyone gets upset with me, I'm not saying nobody can beat the market. Some managers absolutely do. The harder question is this: How do we identify them before they outperform rather than after?

Eugene Fama and Ken French looked at exactly that question in a study called "Luck versus Skill in the Cross-Examination of Mutual Fund Returns". They studied US equity mutual funds and used thousands of simulations to help separate what might be genuine manager skill from what could happen by chance.

And here's what makes their conclusion interesting. They found evidence that some managers really do have skill before expenses. So the research doesn't say all managers are equally talented. But when you include fees and other costs, very few funds appeared capable of delivering enough extra return to make up for what investors paid.

And identifying those rare managers in advance is another challenge altogether. Think of it this way. If I show you the winning lottery numbers from last week, that's not especially helpful for buying this week's ticket. And a great five or ten year investment track record on its own doesn't tell us who will come out ahead next.

That's also why chasing the latest five-star fund, the manager who just had an amazing year, or the hot investment everyone is talking about can be so dangerous. You're often making a decision based on what's already happened in the past. That brings us back to Ellis and the idea of not having to play that game at all.

Jack Bogle, founder of the Vanguard Group, helped make that possible for everyday investors when he launched an index mutual fund in 1976. At the time, critics thought settling for the market's return sounded like a terrible idea. It even earned the nickname Bogle's Folly. Well, apparently the folly caught on.

By the end of twenty twenty-five, passive mutual funds and ETFs represented about 55% of US retail fund assets. In Canada, that figure was still only about 22.6. percent And to be clear, passive doesn't automatically mean sensible. You can create an index around just about anything: one sector, a trendy theme, or a very narrow group of stocks.

Just because a fund tracks an index doesn't mean it's broadly diversified or right for your retirement plan. What we're talking about here is a thoughtful, diversified, low-cost approach to owning markets rather than constantly trying to outguess them. And I should probably stop here and admit something.

I wasn't always investing this way. Early in my career at the bank, I sold actively managed mutual funds. That's what we were trained on, and that's what was promoted, and I genuinely believed we were helping clients make good investment decisions. I can even remember, in a situation with clients where they were asking if they should invest their group RSP plan in index funds, and I said, "Why would you settle for the market return when you can beat the market?" During my time at the bank, we had index funds available, but when they came up, the conversation was usually just that they were cheaper.

We really weren't spending much time talking about the research behind market efficiency, how difficult it is to consistently beat the market, or what higher costs meant over a full retirement. Now, I'm not sharing that to take shots at everyone who recommend active investments. I know plenty of good advisors who believe in what they're doing.

Like I said, I was one of them. But as I spent more time looking at the evidence, my thinking changed, and that became a big part of why we built Awaken Wealth and why we approach investing the way we do. For me, the advisor's real value isn't supposed to come from predicting which mutual fund manager will win next year.

It's understanding what the money is for, building a portfolio that fits the plan, looking at tax efficiency, and helping clients stick with that plan when markets get uncomfortable.

So what should you take away from all this? Well, first, costs matter.

A dollar paid in investment expenses is a dollar that doesn't stay invested and compound for your future. Second, yesterday's winner isn't necessarily tomorrow's winner. Identifying a good manager after a strong track record is easy. Knowing who will outperform next is much harder.

Like I often say to my clients, "My crystal ball doesn't work any better than anyone else's." And third, winning in investing doesn't necessarily mean beating the market. It means investing in a way that gives you a reasonable chance of reaching your goals without making mistakes that can derail your retirement.

There's one other point I don't want to lose from that last episode. Active investors are important. Their research and trading help build information into market prices. The question for you and me isn't whether those professionals should exist, it's whether we need to pay extra to try to pick which of them will win.

So maybe Ellis was onto something. You don't have to hit the winning shot. Sometimes the better strategy is simply to keep the ball in play. And remember, the goal isn't to win a competition against your neighbor or even against an index. It's to build the financial freedom to pursue what matters most to you without having to rely on a paycheck.

Okay, I think that's it for today's episode. I hope this helped explain why we favor an evidence-based investment approach and why it's so difficult to consistently beat the market. In our next episode, we'll continue this investment philosophy series, and we'll talk about incorporating market information. If simply buying the market makes sense, is that the only option, or can we use what the market tells us to build a more thoughtful portfolio?

If you have any questions or ideas for future episodes, feel free to email me at info@retirereadypodcast.com. You'll find links to the research we talked about today in the show notes at retirereadypodcast.com under episode 15. And if you haven't already, be sure to follow or subscribe wherever you listen to your podcasts.

Thanks for joining me today, and I look forward to seeing you back for the next episode.