CNBC stunning stats active management vs index for 1,5 and 15 years

[Maximus]

Article today on CNBC.

https://www.cnbc.com/2025/02/14/why-stock-pickers-still-wont-ever-outperform-market-index-long-term.html

Tried to edit title. Should read 1,5 and 15 years.

Stock picking looks easy, but the numbers prove it isn’t. S&P Global reports that after one year, 73% of active managers underperform their benchmarks. After five years, 95.5% of active managers miss the mark. After 15 years, nobody outperforms.

 

[MichaelB]

Thread title edited. it would be nice to include a snippet so members know what they will find at the link. For example, from the link

Stock picking looks easy, but the numbers prove it isn’t. S&P Global reports that after one year, 73% of active managers underperform their benchmarks. After five years, 95.5% of active managers miss the mark. After 15 years, nobody outperforms.

 

[Maximus]

Thanks Michael. Done.

 

[GrayHare]

Such talk about indexing makes me suspect that trend is nearing the end of its run.

 

[Koolau]

Thanks for sharing. Of course, no big surprise here. I didn't go deep enough in the article/video to see if they discussed the issue of high fund fees and what (negative) effect that has on results.

 

[surprising]

At what point does index fund investing break investing? At some point individual company performance could become meaningless since majority of shares are just bought based on index weighting. Even Bogle in his later years started to question index fund investing.

 

[Koolau]

At what point does index fund investing break investing? At some point individual company performance could become meaningless since majority of shares are just bought based on index weighting. Even Bogle in his later years started to question index fund investing.

Do you have a citation regarding Jack Bogle questioning index fund investing? I'm sure his thinking evolved to some extent as the markets went more toward indexing. I'm sure indexing changed some things in the markets and meant that changes in the indexing strategy might have been warranted. But I haven't heard of JB "changing his mind" on the subject. I'd be interested in whatever you are aware of to suggest that he did evolve more than at the edges. Thanks.

 

[surprising]

Do you have a citation regarding Jack Bogle questioning index fund investing? I'm sure his thinking evolved to some extent as the markets went more toward indexing. I'm sure indexing changed some things in the markets and meant that changes in the indexing strategy might have been warranted. But I haven't heard of JB "changing his mind" on the subject. I'd be interested in whatever you are aware of to suggest that he did evolve more than at the edges. Thanks.

I wrote "started to question," not "changing his mind".

Blurb from chatgpt referencing a 2018 article:

In a 2018 Wall Street Journal op-ed, Bogle cautioned that if index funds controlled too large a portion of the market—he suggested around 50% or more—it could lead to governance issues. His main concerns included:

1. Excessive Concentration of Ownership – A small number of large index fund providers (such as Vanguard, BlackRock, and State Street) would end up owning significant stakes in most public companies, potentially leading to conflicts of interest and reduced accountability.
2. Corporate Governance Risks – If index fund managers don’t actively engage with company management, it could weaken shareholder oversight and corporate decision-making.
3. Market Efficiency Distortions – While index funds rely on market efficiency to function well, if too many investors are passively invested, price discovery could suffer because there would be fewer active managers making fundamental investment decisions.

 

[Koolau]

Thanks for the info. I think at least tangentially, the CNBC video touched on this. If I heard it right (and interpreted it correctly) they were suggesting that "all indexing" (IOW the death of "stock picking" by the experts) could lead to perturbation of the greater investment system with unknown or perhaps deleterious effects.

But, also from the video, the speaker suggested that stock-picking mutual funds were attracting even MORE smart people (not less - due to indexing) and the business model was safe from pure indexing for the foreseeable future.

I loved the speaker's example, demonstrating the current situation within the stock-picking industry. His contention is that pertinent information within the equities markets is so readily available now that operating stock-picking funds is like playing poker with the cards all turned face up. Classic!

 

[marko]

All good stuff, but I wonder how the brave new world of AI will eventually change the landscape. I could see a day where an AI could beat the market--and eventually BE the market--voiding the 15 year data point.

 

[Koolau]

All good stuff, but I wonder how the brave new world of AI will eventually change the landscape. I could see a day where an AI could beat the market--and eventually BE the market--voiding the 15 year data point.

I enjoy the movie "NEXT" with Nick Cage. In the movie he makes a statement:

"Here's the thing about the future. Every time you look at it, it changes — because you looked at it — and that changes everything else."

Not to get too metaphysical or anything, but I wonder if using AI would have the same effect - that is, to change things because now so much more is known about the future. Just my musings on the subject.

 

[Chuckanut]

Will index funds take over the market completely? I don't know. But, at some point I would think that another John Templeton, Peter Lynch, Michael Price, etc. will come along.

 

[tulak]

Such talk about indexing makes me suspect that trend is nearing the end of its run.

I’m skeptical. Too many think they can beat the market and don’t stick to indexing strategies.

 

[frayne]

Expenses matter and are a drag on returns, especially in the long term, which in and of itself and all other things being equal, is enough to make index funds preferable to managed funds.

 

[OldShooter]

Stunning ?!??! No one who has been paying attention should be stunned. Over a half century of data has shown this.

Nobel laureate Michael Jensen, 1964 The Performance of Mutual Funds in the Period 1945-1964 "The evidence on mutual fund performance (aka professional speculators) indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance."

Nobel laureate William Sharpe: Sharpe on "The Arithmetic of Active Management": active (Note: Sharpe here shows that active management on average can never win.)

But ... human nature virtually guarantees that the market will never be 100% indexed: 18th century economist Adam Smith's comment on some human delusions: "The overweening conceit which the greater part of men have of their own abilities [and] their absurd presumption in their own good fortune." as quoted in "Against the Gods; The Remarkable Story of Risk" by Peter Bernstein.

 

[walkinwood]

The abstract of this article states that in 2023,

While index funds held 16% of the US stock market in 2021, we put the true
passive-ownership share at 33.3%. Our headline number is twice as large
because it reflects index funds as well as other kinds of passive investors,
such as direct indexers and active managers who are closet indexing.

https://www.hbs.edu/ris/Publication%20Files/double-what-you-think-it-is%20may%2023_3c1ae213-5aec-407d-b656-13e3822f0b8b.pdf

I don't know if it is fair to count direct indexers and closet indexers - but I didn't read the article and have no informed opinion.

 

[Gumby]

... "Against the Gods; The Remarkable Story of Risk" by Peter Bernstein.

This is a truly great book. I found it incredibly interesting and have reread it twice since I first bought it 25 years ago.

 

[surprising]

Thanks for the info. I think at least tangentially, the CNBC video touched on this. If I heard it right (and interpreted it correctly) they were suggesting that "all indexing" (IOW the death of "stock picking" by the experts) could lead to perturbation of the greater investment system with unknown or perhaps deleterious effects.

But, also from the video, the speaker suggested that stock-picking mutual funds were attracting even MORE smart people (not less - due to indexing) and the business model was safe from pure indexing for the foreseeable future.

I loved the speaker's example, demonstrating the current situation within the stock-picking industry. His contention is that pertinent information within the equities markets is so readily available now that operating stock-picking funds is like playing poker with the cards all turned face up. Classic!

I wonder if there is a way of creating a new type of index fund that doesn't affect the market at all. For example, a fund that has infinite number of shares, and the value is always equal to S&P 500. There is no buying/selling of the underlying shares of the S&P 500 at all. This allows you to 'invest' in the S&P 500 companies and participate in any gains or losses, but not impact the movement of those companies solely due to owning a fund. A CEF gets close, but the limited number of shares is too restrictive for the amount of volume you'd get from a real index fund.

 

[TheWizard]

I wonder if there is a way of creating a new type of index fund that doesn't affect the market at all. For example, a fund that has infinite number of shares, and the value is always equal to S&P 500. There is no buying/selling of the underlying shares of the S&P 500 at all. This allows you to 'invest' in the S&P 500 companies and participate in any gains or losses, but not impact the movement of those companies solely due to owning a fund. A CEF gets close, but the limited number of shares is too restrictive for the amount of volume you'd get from a real index fund.

This looks like a solution in search of a problem...

 

[Route246]

Expenses matter and are a drag on returns, especially in the long term, which in and of itself and all other things being equal, is enough to make index funds preferable to managed funds.

This is a huge number one, the expenses. It is not the elephant in the room, it is the entire animal kingdom in the room.

My significant number two is a 500 index fund with micro expense ratio establishes a higher floor in the event of a downturn while minimally impacting the ceiling that a managed fund may coincidentally outperform for a short interval of time. The managed fund will always be sacrificing its floor when the inevitable market correction happens. These managed funds always tout beating the market but are focused on returns in a bull or neutral market. What they never seem to talk about is how they cap their losses in the event of a correction. When you factor in managed fund expense ratios it is a no brainer.

Corrections happen. Do you trust your managed fund to outperform a 500 index fund during those corrections?

Like Charlie Sheen saying he pays them to leave, I feel the same way about my 500 index funds, I don't pay them for their gains, I pay them for the floor they establish during downturns to preserve as much of my capital as possible.

If you're in equities you're not a virgin anymore. Play it safe, prosper when things are going well and lose less when things are not going so well. FXAIX has a 0.015% expense ratio. Absolutely mind-boggling. Edward Jones charges something like 1.3% AUM which is approximately 86x of FXAIX. Do that for 20 years including compounding and that is some serious money.

No thanks for my equities holdings. I'll leave them in 500 index funds. I may be wrong but I don't really think so. One thing I'm sure about is there is nothing out there in the equities space that never loses to the market while also never beating the market because it is the market. If you have a long term goal to beat the market you may on a fool's errand. But, who knows? Past performance is not indicator of future gains or something like that.

Happy savings.

 

[donheff]

I enjoy the movie "NEXT" with Nick Cage. In the movie he makes a statement:

"Here's the thing about the future. Every time you look at it, it changes — because you looked at it — and that changes everything else."

Not to get too metaphysical or anything, but I wonder if using AI would have the same effect - that is, to change things because now so much more is known about the future. Just my musings on the subject.

I like it. The uncertainty principle tripping up the quants. Heisenberg stepping into classical realms.

 

[Route246]

I like it. The uncertainty principle tripping up the quants. Heisenberg stepping into classical realms.

I know a few quants who are ex-colleagues and now work for hedge funds. Their whole game is to get there before the next time quantum elapses and their competition arrives. They are working with millisecond precision and in some cases microsecond precision. They know their data expires very quickly and any market inefficiency will be fixed, if not by them, by someone else. It is fascinating stuff, amazingly simple conceptually but very difficult to execute in real time. The best architects are very well paid, too. These guys have embedded/realtime coding backgrounds, BTW. The one thing they seem to have in common is they are financially greedy but also very competitive.

 

[OldShooter]

Interesting that the article cited in the OP doesn't mention the S&P 500 but I stopped counting at 20 mentions in the subsequent posts. The overall focus on the S&P (not just this thread) is a mystery to me. Every stock in the S&P was once not in the S&P. To me, buying total market funds to capture rising stars is a no-brainer for any long-term investor.

 

[Koolau]

I like it. The uncertainty principle tripping up the quants. Heisenberg stepping into classical realms.

Right on.

By the way, now when I hear "Heisenberg" I instantly think of Walter H White.

 

[tulak]

Interesting that the article cited in the OP doesn't mention the S&P 500 but I stopped counting at 20 mentions in the subsequent posts. The overall focus on the S&P (not just this thread) is a mystery to me. Every stock in the S&P was once not in the S&P. To me, buying total market funds to capture rising stars is a no-brainer for any long-term investor.

I get your point, but the difference between S&P500 performance versus Total Market is trivial, to the point you can use them interchangeably in these discussions.