Who Routinely Trounces the Stock Market?  Try 2 out of 2,862 Funds!

Many investors and advisors use active management (stock picking) to try to beat the market.  After fees, expenses, trading costs and taxes, active managers typically don’t beat their benchmark.  Look at this NY Times article.

Active vs. Passive investing:

Who Routinely Trounces the Stock Market? Try 2 Out of 2,862 Funds!  via NY Times

“The study examined mutual fund performance in recent years. It found that very few funds have been consistently outstanding performers, and it corroborated the adage that past performance doesn’t guarantee future returns.   The S.&P. Dow Jones team looked at 2,862 mutual funds that had been operating for at least 12 months as of March 2010. Those funds were all broad, actively managed domestic stock funds. (The study excluded narrowly focused sector funds and leveraged funds that, essentially, used borrowed money to magnify their returns.)   The team selected the 25 percent of funds with the best performance over the 12 months through March 2010. Then the analysts asked how many of those funds — those in the top quarter for the original 12-month period — actually remained in the top quarter for the four succeeding 12-month periods through March 2014.   The answer was a vanishingly small number: Just 0.07 percent of the initial 2,862 funds managed to achieve top-quartile performance for those five successive years. If you do the math, that works out to just two funds. Put another way, 99.93 percent, or 2,860 of the 2,862 funds, failed the test.   The study sliced and diced the mutual fund universe in a number of other ways, too, each time finding the same core truth: Very few funds achieved consistent and persistent outperformance. Furthermore, sustained outperformance declined rapidly over time. And the report said, “The data shows a likelihood for the best-performing funds to become the worst-performing funds and vice versa.””

—————– Many people think that just using a low cost company like Vanguard will solve all of their problems but it is not that simple.  Don’t get me wrong, we like Vanguard and other low-cost ETF’s but many people need a coach to help them with portfolio discipline and strategy.

1. What is your philosophy for investing?  Active, Indexing or Passive Investing with factor tilts (toward value, small cap, profitability and using momentum)
2. What is your strategy for asset allocation on a global basis?
3. What is your process to eliminate middlemen and get institutional pricing?
4. How do you benchmark your results net of all fees and taxes?

Many investors think they are doing OK but the real question is compared to what benchmark!  Really, take a look and see how you actually compare.  If you use an advisor that charges 1% or brokers like Merrill Lynch, UBS, Wells Fargo, Fidelity or Morgan Stanley, you need to ask yourself if you can afford this expensive strategy for your portfolio. I encourage you to check the math for your personal portfolio.  Go to Morningstar and use their free portfolio manager.  It will take you 15 minutes to load your personal portfolio as a watch list.  I also encourage you to add some Vanguard Funds and some DFA funds that tilt toward value and small cap. Find out more details Why we use Dimensional Funds (DFA) vs. Vanguard  –  See why we think that Dimensional Funds (DFA) combines the best of active management and passive management by focusing on higher dimensions of expected returns (value companies, small cap companies, companies with high profitability and using momentum as a trading strategy). Need more proof?

“For 98% of Americans, this is the best way to invest”- Charles Schwab, May 2014

2014 – CNN- Money — David Booth beats the market without picking stocks – Jan

His advice…. Most people should use low cost index funds! The markets are very efficient and it is important to control the factors that matter most (low cost, massive diversification, use a fee-only fiduciary). Most people are shocked when we help them calculate their total investing expenses! If you need help, give us a call. We offer 100% free 2nd opinions for portfolios over $500k. This can be done with a 30 to 45 minute phone call or meeting. Good luck to all.
Click here to subscribe to my blog

Photo via Colin Kinner – https://flic.kr/p/4ms8ZA