Mutual Funds That Consistently Beat the Market? Not One of 2,132

No actively managed stock or bond funds outperformed the market regularly over the last five years. Index funds have generally been better.

Writing for The New York Times, Jeff Sommer, explained the results of a recent study of actively managed mutual funds conducted by S&P Dow Jones Indices that concluded "not a single mutual fund — not one — managed to beat its benchmark in either the U.S. stock or bond markets regularly and convincingly over the last five years."

 

"These findings support practical advice that has been the academic consensus for decades. Forget about trying to beat the odds and outsmarting everybody else. Instead, use low-cost stock and bond index funds that mirror the overall market, and keep them for decades." 

In summary, "most actively managed mutual funds do worse than their benchmark index, both over the long run and in the vast majority of calendar years, in the United States and elsewhere around the globe."

Bottom line: Invest in low-cost index funds and Exchange Traded Funds (ETFs).

50 Years Later, Burton Malkiel Hasn’t Changed His Views on Indexing

 Burton Malkiel, the author of the classic book A Random Walk Down Wall Street still believes that individual investors can't "beat" the stock market. 

Writing for The Wall Street Journal, Daniel Akst:

'FIFTY years ago this January, an economist named Burton Malkiel published a book calling for an innovation on behalf of the small investor. “What we need,” he wrote, “is a no-load, minimum-management-fee mutual fund that simply buys the hundreds of stocks making up the broad stock-market averages and does no trading from security to security in an attempt to catch the winners.”'

"Dr. Malkiel, 90 years old, still says index investing beats other approaches, and he has half a century of additional data to bolster his case, which he does in a 50th anniversary edition of the book to be published in January. By now an investing classic, “A Random Walk Down Wall Street” has been updated to cover the many financial innovations (from exchange-traded funds to Ethereum) since it was first published. The book retains its author’s trademark blend of erudition and wit—and his insistence that markets really are efficient." 

DR. MALKIEL:  "Each year about two-thirds of active managers underperform the index, and those who outperform in one year are not the same as those who outperform in the next. S&P does something called Spiva, in which they compare the S&P indexes with active managers. And what it shows is that over a 10-year period, roughly 90% of domestic stock funds, for example, are outperformed by the index." (S&P: Standard and Poor's)

WSJ: You advocate indexing, dollar-cost averaging and diversification, and you make mincemeat of such practices as technical analysis, ESG and “smart beta.” You see cryptocurrencies as too risky. 

Popular Personal Financial Advice versus the Professors

 "JAMES J. CHOI is a finance professor at Yale University. But in a recent paper titled “Popular Personal Financial Advice versus the Professors,” Choi played the role of (somewhat) neutral arbiter. The question he sought to answer: Do popular—that is, non-academic—personal finance books offer advice consistent with the academic literature? And if not, is that a problem?"

Adam M. Grossman distills the essence of Choi's study in an easily digestible post on the Humble Dollar https://humbledollar.com website. 

"To conduct his study, Choi looked at 50 personal finance titles including The Millionaire Next Door, Rich Dad Poor Dad, A Random Walk Down Wall Street and I Will Teach You to Be Rich. As you might guess, Choi found a sizable disconnect between the academic literature and the advice offered by popular titles." 

Read Grossman's fascinating summary here: https://humbledollar.com/2022/09/book-smart/?utm_source=mailpoet&utm_medium=email&utm_campaign=another-ses-test_7

Bottom line: the only area in which the academic researchers and the popular authors agreed was on was that index funds are superior to actively managed funds.  

 

Wall Street Brokers missed the memo on Index Funds

"In recent years, investors have been flocking to low-cost index funds, driven by their long-term record of outperforming higher cost actively managed funds" writes Randall Smith in The Wall Street Journal (10/7/19). However, clients of Wall Street brokers have just 29% of assets in passive index funds according to a report by Cerulli Associates. The situation is even worse for clients of regional and independent firms with only 20-22% of assets invested in index funds. Who is getting rich? Certainly not the client who is paying high fees for funds that under perform their indexes. The benefits of index investing has been a major theme of this blog. Check out other posts that may convince you that your charming, persuasive broker may not have your best interests in mind.

Vanguard mutual fund company lowers fees on index mutual funds

Vanguard is famous for its low investment expenses but now the deal gets even better. 
The Wall Street Journal reports that Vanguard is lowering the minimum investments needed to qualify for admiral shares which charge lower expenses than the regular investor class of funds. Instead of $10,000 minimum to qualify for lower expense ratios, one only need to invest $3,000. The new lower fees apply to 38 index mutual funds.
Details at: https://investornews.vanguard/our-index-funds-changed-investing-forever-now-were-making-them-even-better/

Low-cost mutual funds have virtues beyond being cheap

"While cost savings are one obvious advantage of low- or no-fee mutual funds, there are some others investors may not realize, writes Lewis Braham. These funds also exhibit low volatility, which may help investors resist the temptation to trade too often." 

Low fees leave more money to invest. Low volatility discourages costly trading. The combined result: better returns.

By

Lewis Braham, Aug. 24, 2018

https://www.barrons.com/articles/best-mutual-funds-for-investors-cheap-and-boring-1535145075?reflink=smartbrief

Wall Street is bleeding investors dry

Quoted from “Americans Aren’t Saving Enough for Retirement, but One Change Could Help” by Eduardo Porter in The New York Times: March 3, 2015

“Everybody’s big focus is that we have to save more,” said John C. Bogle, founder and former chief executive of Vanguard, the investment management colossus. “A greater part of the problem is the failure of investors to earn their fair share of market returns.” His observation suggests a different policy prescription: shoring up Americans’ retirement requires, first of all, aligning the interests of investment advisers and their clients. A research paper by Mr. Bogle published in Financial Analysts Journal makes the case. Actively managed mutual funds, in which many workers invest their retirement savings, are enormously costly. First, there is the expense ratio — about 1.12 percent of assets for the average large capitalization blend fund. Then there are transaction costs and distribution costs. Active funds also pay a penalty for keeping a share of their assets in low-yielding cash. Altogether, costs add up to 2.27 percent per year, Mr. Bogle estimates. By contrast, a passive index fund, like Vanguard’s Total Stock Market Index Fund, costs merely 0.06 percent a year in all. Of course, Mr. Bogle has a horse in the race. He founded the Vanguard Group. He invented the first index fund for the public. His case is powerful, nonetheless.

“Assuming an annual market return of 7 percent, he says, a 30-year-old worker who made $30,000 a year and received a 3 percent annual raise could retire at age 70 with $927,000 in the pot by saving 10 percent of her wages every year in a passive index fund. (Such a nest egg, at the standard withdrawal rate of 4 percent, would generate an inflation-adjusted $37,000 a year more or less indefinitely.) If she put it in a typical actively managed fund, she would end up with only $561,000.” Read the details at: http://www.nytimes.com/2015/03/04/business/americans-arent-saving-enough-for-retirement-but-one-change-could-help.html?_r=0

One More Reason to Choose Index Funds

"Mutual fund managers would seem to possess myriad advantages over the average individual investor: a business degree, a deep understanding of corporate finance, and years of experience.
But you wouldn’t know it based on how their personal portfolios fare.
A new study of mutual fund managers in Sweden found that that they “do not exhibit superior security-picking ability” when managing their personal portfolios, compared with similarly situated private citizens who also invest for themselves.
Using detailed tax and investment information contained in Swedish government data bases, researchers from the University of Notre Dame and Michigan State University were able to link individual fund managers to their personal equity portfolios and returns, which were then compared with the returns of non-experts with similar socioeconomic characteristics, such as education and age.
Based on the risk-adjusted returns for each group, the researchers found that the fund managers’ personal equity portfolios – individual company stocks and also the stock mutual funds they hold – performed no better than the private investors’ equity portfolios."
Thanks to the Squared Away Blog: http://squaredawayblog.bc.edu/squared-away/investment-managers-are-human-too/

Middle aged with no retirement savings?

How can a middle-aged single parent with zero retirement savings reorganize her finances to start investing for the future?  Read the advice of Robert Stammers, director of investor education at the CFA Institute. http://time.com/money/3222252/retirement-strategy-when-nothing-saved/. Don't be put off by the high income figures he cites. Regardless of your income you need to come to grips with reality and start investing for retirement today. You can start an IRA with as little as $100 in the Schwab Total Stock Market Index Fund (SWTSX). Learn more on the Financial Planning for Women website (Click on Mutual Funds 2013): http://www.usu.edu/fpw/schedule/powerpoints.htm

Is index investing boring and are returns mediocre?

David Ning disagrees with both arguments that active investors use. "If you've written off index funds in favor of active management, consider these arguments for indexing."

"Index investing can be a tricky topic to tackle at parties, but I love telling people about the strategy because I want my friends to benefit from their money working for them with less stress than investing in active strategies. I admit it can be tough, though, as the conversation can sometimes turn people away. After all, many people develop misconceptions about index funds and have written them off as an efficient way to build wealth. I outline a few common misconceptions about investing in index funds below. How many of these have you heard?" get the details at: http://money.usnews.com/money/blogs/on-retirement/2014/08/13/4-common-misconceptions-about-index-investing

There are no mutual fund managers in Lake Wobegone

Successful Mutual-Fund Managers Beat The Competition. Very Few Beat The Market.
"A study of thousands of mutual-fund managers has found that the key to success isn’t beating the market — only a tiny minority can do that over multiple years — but beating the competition. Managers who fall behind performance benchmarks and other mutual funds tend to lose their jobs, while managers who can stay ahead of the pack stay in business, even if they lose to the ultimate competitor, which is the market itself."
"The paper in the current issue of the Financial Analysts Journal adds further evidence that most human beings, for all their wonderful attributes, are below average when it comes to managing large amounts of money. Managers who survived the competitive gauntlet for 10 years have better records than those who were removed from funds after a year or two, the study found, but they showed no ability to beat the market when their performance is measured against the markets and investment styles of their funds." Read more by Daniel Fisher in Forbes at http://www.forbes.com/sites/danielfisher/2014/08/07/winning-mutual-fund-managers-beat-the-competition-not-the-market/
Bottom line: Pass up actively managed funds and buy low cost index mutual funds or exchange-traded funds. (If you aren't familiar with Lake Wobegone and Garrison Keillor, "all the children are above average.")

Index Funds Outperform Actively Managed Funds

The latest research confirms what many other studies have demonstrated: that investors should put their money in low cost index funds and skip higher cost actively managed mutual funds.  ETF manager Rick Ferri compared passive (index) funds against 5,000 randomly selected active portfolios using 32 different investing strategies. “The indexing solution won 82.9% of the time on average, and in the small percentage where active funds outperformed the median outperformance was 0.5%.” According to Ferri, “The bottom line is a fee. Fees matter.”  And if taxes were added into the mix, the advantage for indexing over actively managed funds would be even greater. Read a bit or detail or delve into the full study with this link:

http://www.thinkadvisor.com/2014/01/28/how-does-passive-beat-active-let-me-count-the-ways?page_all=1