Index Funds Consistently Outperforming Active Management 6 comments
May 30, 2008
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1. The
S&P 500 Index consistently outperformed 98% of mutual fund managers
over the past three years and 97% over the past 10 years, ending
October 2004. In two 30-year studies, the S&P 500 outperformed 97%
and 94% of managers. In addition, only about 12% of the top 100 of
managers repeat their performance in the following years. Therefore, it
is not possible to consistently pick next year’s hot mutual fund
manager.
From IFA.com
2. Over fifteen years to 1998, on a pre-tax basis the Vanguard S&P 500 index fund outperformed 94% of general equity mutual funds and 97% on a post-tax basis. The post-tax average difference in annual performance was 4.2%.
~From Common Sense on Mutual Funds, by John Bogle
Bottom Line: If you scored at the 97% level on the LSAT (score of about 169-170), I think you'd feel pretty good, especially if you didn't even have to study too hard (like index investing). On the other hand, if you paid a test preparation company thousands of dollars (like a mutual fund manager or investment advisor) and got a score far below the 97% percentile (which you pretty much could have gotten on your own for free), I think you'd feel pretty bad.
From IFA.com
2. Over fifteen years to 1998, on a pre-tax basis the Vanguard S&P 500 index fund outperformed 94% of general equity mutual funds and 97% on a post-tax basis. The post-tax average difference in annual performance was 4.2%.
~From Common Sense on Mutual Funds, by John Bogle
Bottom Line: If you scored at the 97% level on the LSAT (score of about 169-170), I think you'd feel pretty good, especially if you didn't even have to study too hard (like index investing). On the other hand, if you paid a test preparation company thousands of dollars (like a mutual fund manager or investment advisor) and got a score far below the 97% percentile (which you pretty much could have gotten on your own for free), I think you'd feel pretty bad.
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in fact, it is an anti-alpha article so i wonder why the author even bothers to post it here? if you think alpha (and that's what active management is all about) isn't achievable consitently, then well, seeking alpha may not be the place to go. or you should write an article that the entire concept of seeking alpha is flawed.
there are very smart fund managers and stocks out there that consistently (niot every quarter and not every year, but over ANY extended period of time greatly outperformed the market. be it buffet, whitman, berkowith, pzena, rodriguez, greenblatt klarman - you name them
to state that you cannot identify quality active fund managers and hence are bound to end up buying into one of the 90%+ underperformers is hollow and nonsensical. it's just a thesis with zero evidence presented.
now, regarding index funds: though heavily promoted, index funds by definition underperform the stock market indices 100.00% of the time! each and everyone of them, 100% assured.
that's a score of zero. very smart, indeed!
second,index funds are by no means passive/inactive. in fact, stock market indexes have become rather heavily actively managed "funds" themselves over the past 10-15 years. So much and so badly managed that i would strongly disregard them as a good performance measure alltogether! Studies show that doing much less in terms od adding and dropping of stocks to stock market indexes would greatly enhance the index's long term performance.
just as an example, had IBM been kept in the DJIA and not been dropped for a couple of years, the Dow would be more than 15% higher today!
so of course, it is true the huge majority of actively managed funds fail to even hold up to the itself badly managed indexes. but the reasons for that are manyfold. one of them is the huge restrictions fund managers are operating under when compared to individual investors. that's both from a cost and from an opportunities point of view. So i would go as far as to say that the private, retail investor actually should have little difficulty in outperforming the S&P or the Dow or whatever index you may chose simply by chosing a handful of good established stocks and then hold them without trying to time them, or to trade in and out or to catch the next fancy and hype. Buy-hold and only make a few long-term adjustments.
unfortunately, most people can't sit tight for any extended period of time trying to do something at least, even if it adds negative value.
the same is true for most active fund managers. they do too much, and they do so often because just a few quarters of underperformance often leads to flight by "investors", forcing in turn redemptions and selling of fund's holdings.
etf's make some sense - sometimes. but very often they don't.
running almost any randomly chosen diversified portfolio of 20 or 30 major exchange stocks and keeping turnover low will beat ETFs hands down. the point is, most people find it hard to do nothing. and here come the etfs which make it convenient to flip sectors, regions on a whim. you don't make any money that way though. only brokers and etf companies do
I have never met anyone that can pick up winner consistently. All money managers should be filed and get a more productive job.
My point is, that comparing ETFs and active" mutual funds the way the other did makes little sense. And that the retail investor is better of without most of the "actively managed" mutual funds and without almost all ETFs.
The most hillarious thing is actually the headline:"index funds sonsistently OUTPERFORM actively managed funds". As if they would "do" anything to ouptperform. Rather, most actively managed funds underperform even the etfs. That would characterize the situation much more appropriate.