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

[MarieIG]

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.

At that point - would there be - dueling AIs?

I keep hearing on podcasts about "algos" kicking in at certain levels to buy / sell, although I don't think these exactly meet the definition of AI - yet.

 

[TheWizard]

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.

That is correct...

 

[Dtail]

At that point - would there be - dueling AIs?

I keep hearing on podcasts about "algos" kicking in at certain levels to buy / sell, although I don't think these exactly meet the definition of AI - yet.

When I was working on Wall Street, we supported various hedge funds. A few of these hedge funds participated in a trading concept called "Program Trading". Basically it was a very sophisticated trading system written by PHD types. The program would automatically trigger massive buys or sells based on various minute imbalances based on theoretical trading concepts. They made a lot of monies, being some of the first entries into this kind of trading.
AI down the road could be a much more sophisticated concept of this type.

 

[PlayinwithFIRE]

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.

That's not metaphysical, that's physical. Its the Heisenberg uncertainty principle in action.

 

[Stormy Kromer]

Ah hell.

I've been investing since 1982. I thought I could beat the market. I bought into money manager news letters, then I had Financial Planners set me up with their very heavily loaded plans, including annuities and other stuff. I finally quit and went to Vanguard index funds on my own.

I can tell everyone here with certainty. If I had invested everything in the SP 500 from the start I know I would have twice the money I do now.

Take my free advice and do the same.

 

[Koolau]

Ah hell.

I've been investing since 1982. I thought I could beat the market. I bought into money manager news letters, then I had Financial Planners set me up with their very heavily loaded plans, including annuities and other stuff. I finally quit and went to Vanguard index funds on my own.

I can tell everyone here with certainty. If I had invested everything in the SP 500 from the start I know I would have twice the money I do now.

Take my free advice and do the same.

Yeah, join the club. Compared to what I did, the S&P500 not only would have done a lot better, it would have been a lot less complicated.

I do think some fixed and/or bonds would be good for balancing, but definitely a broad index (Like S&P500) but YMMV.

 

[Route246]

Yeah, join the club. Compared to what I did, the S&P500 not only would have done a lot better, it would have been a lot less complicated.

I do think some fixed and/or bonds would be good for balancing, but definitely a broad index (Like S&P500) but YMMV.

Bob Brinker and John Bogle convinced me many decades ago that index funds could probably not be beat. I never day traded when all of my friends were. I put almost every spare dollar into SPY or VT like funds. I'm pretty sure I have 2x-3x more than if I would have been an "active" trader during those decades. The power of compounding cannot be understated, either. Wow!!!

 

[OldShooter]

Ah hell.

I've been investing since 1982. I thought I could beat the market. I bought into money manager news letters, then I had Financial Planners set me up with their very heavily loaded plans, including annuities and other stuff. I finally quit and went to Vanguard index funds on my own.

I can tell everyone here with certainty. If I had invested everything in the SP 500 from the start I know I would have twice the money I do now.

Take my free advice and do the same.

My story almost exactly. I tell people that I'm a slow learner. It took me 30 years to figure out how easy this is.

 

[imjustawarrior]

It amazes me how strong the evidence is to use index funds and stay the course and people still use active funds and try to time the market. I like keeping things simple and spending my time on more enjoyable activities.

 

[WhenIsItTime]

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.

Interesting it's CNBC posting the article. I tune into to CNBC frequently, but agree generally with this article...

How CNBC Built an Entire Financial Channel That Mainly Loses People Money

If you want to make money in the stock market, change this channel.

slate.com

The CNBC paradox is that giving investors more information can hurt them because—hello, hypervigilance—it makes them think they need to act all the time to make money, when the opposite is actually true.

 

[Fotodog]

I went through the same right of passage early in my investing life. Remember the “Dogs of the Dow” promoted by the Motley Fools? The premise was to pick the 4 stocks out of the Dow 30 with the poorest performance for that year, thinking that these companies were too big to fail with worldwide exposure and would come back strong. They had lots of charts and back testing to prove their point, so it seemed like a safe plan with little risk and a strong upside. Wellll, 2 of the 4 I bought (one was Eastman Kodak) continued a downward spiral and never recovered. I learned my lesson and put everything in mutual funds. As has been said, with the power of compounding, it was the best decision I could have made.

 

[mountainox]

My favorite saying from my USAF years. "Measure it with a micrometer, mark it with pencil and cut it with an axe". This might apply to "active management" YMMV

 

[Al18]

KODK performance over the past 5 years has outpaced the SP500. 5 year total return is 119%.

 

[OldShooter]

It amazes me how strong the evidence is to use index funds and stay the course and people still use active funds and try to time the market. I like keeping things simple and spending my time on more enjoyable activities.

I am not amazed at all. DOL estimates that there are about a million people working in the investment industry. Most of those jobs and a staggering amount of money depend on relentlessly selling two myths:

1) There are people who can consistently pick stocks that will outperform the market.

2) It is possible for small-time investors to access these stock-picking experts for a pittance by buying mutual funds, investment advisory services, or market letters.

I think the people pushing these myths are a mixture of consciously dishonest people who understand that they are pushing myths and people who are willfully ignorant.

As Upton Sinclair told us maybe a century ago: “It is difficult to get a man to understand something when his salary depends upon his not understanding it”

 

[OldShooter]

KODK performance over the past 5 years has outpaced the SP500. 5 year total return is 119%.

Not sure what your point is. It has been shown repeatedly that success in the market is indicative of luck, not skill. But with something like 10,000 mutual funds we can be sure that there will be few lucky monkeys, especially over short periods of time like 5 years. Spotting lucky monkeys in the rear view mirror is trivially easy, Spotting them through the windshield, not so much.

So, when did you get into KODK and with what percentage of your portfolio?

 

[audreyh1]

It amazes me how strong the evidence is to use index funds and stay the course and people still use active funds and try to time the market. I like keeping things simple and spending my time on more enjoyable activities.

People get very impatient in the short term and also only look at very recent performance. I agree with you, I want minimal effort and focus on the long game.

 

[Koolau]

People get very impatient in the short term and also only look at very recent performance. I agree with you, I want minimal effort and focus on the long game.

Let us raise a toast to St. Jack! May he rest in peace.

 

[Exchme]

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

No, it's just math. If you throw all the active traders in a bucket, their average return must equal the market return (since indexers by definition just take the average return, the sum of all non-indexers must also be the average return). So before fees, we would expect the number of winning active funds to look like random chance vs. indexing and in practice that's just about right. After fees, active funds would be expected to fall behind by the difference between their fees and passive fund fees and that's also what's actually seen in the real world.

Active funds are also less tax efficient as they buy and sell more often than a total market fund, dragging things down several tenths of a percent per year more vs. indexers.

As for "skilled" managers that can outperform year after year, there's also no evidence. To they extent that they may exist, their outperformance doesn't overcome the fees they charge - effectively the manager pockets the outperformance and then some. In order for things to change, "skilled" managers would have to stop wanting to get paid, which seems a bit unlikely.

 

[OldShooter]

It amazes me how strong the evidence is to use index funds and stay the course and people still use active funds and try to time the market. I like keeping things simple and spending my time on more enjoyable activities.

Funny thing: Schwab publishes a quarterly magazine and sells a few pages to others. Rowe Price always has a page. Now reading the Winter issue and amused to find that Rowe Price is capitulating to indexing in a sort of backhanded way:

"At T. Rowe Price our investment professionals rely on our time tested active management approach ... As a result, our funds have delivered more returns than those of other active managers. ... "​

I guess they are not competing with passive funds any more, just satisfied to be the tallest midget!

 

[Closet_Gamer]

I don't think indexing will destroy the market.

1 - to the points above, there will ALWAYS be people who want to beat the market

2 - I think the % of people battling it out to do the price discovery will always be high enough to keep the market fairly efficient. If we started seeing en masse that specific stocks don't react up-or-down to significant news, I'd worry that price discovery is failing. We continue to see large moves in response to earnings announcements and other activity ... which suggests that the price discovery activity is alive and well.

I do think the risk of indexing is that it is just so easy to do, that it attracts lots of capital and drive up stock prices in aggregate simply through demand for equities.

 

[OldShooter]

... I do think the risk of indexing is that it is just so easy to do, that it attracts lots of capital and drive up stock prices in aggregate simply through demand for equities.

I have not seen that argued. Do you have links or data that would support that theory?

 

[Closet_Gamer]

I have not seen that argued. Do you have links or data that would support that theory?

Nope. Just my guess and watching my own behavior:

DD is just hitting that stage of life to start investing.

In a bygone era I might have said “put it in a savings account” or a CD. Maybe race to buy a house.

Now I’m going to show her how to buy an index fund in about four clicks. She will show up in the market as demand for equities.

As an indexer, she puts her demand against the giant basket of equities. New demand for something tends to drive price.

 

[jollystomper]

The gambling world is not shrinking, it is expanding to more and more things. Casinos are not losing money due to lack of volume, sports books have exploded, and one can even bet on elections. In that nature, there will always be an excess of folks who will not index, because they will always think they can beat the market, even when they don't . I think indexing will continue to work fine.

 

[Koolau]

I don't think indexing will destroy the market.

1 - to the points above, there will ALWAYS be people who want to beat the market

2 - I think the % of people battling it out to do the price discovery will always be high enough to keep the market fairly efficient. If we started seeing en masse that specific stocks don't react up-or-down to significant news, I'd worry that price discovery is failing. We continue to see large moves in response to earnings announcements and other activity ... which suggests that the price discovery activity is alive and well.

I do think the risk of indexing is that it is just so easy to do, that it attracts lots of capital and drive up stock prices in aggregate simply through demand for equities.

What makes it easy to invest in index funds means it's also easy to bail out of them - suggesting that they may exacerbate volatility.

I've just told you way more than I know. IOW YMMV.

 

[youbet]

Sooooo............

If instead of buying a single, broad index fund such as VTSAX or VTI, you buy several more focused index funds (domestic large cap, domestic completion, emerging market and international large cap for example) and do a bit of shifting between those indexes, are you still an indexer or are you now an "active investor?"

If you do go the single index fund route, does it have to be market cap weighted or could you also use an equal rated index fund for some of your stash and still be called a true blue "indexer?"

If you tossed in a bit of a REIT index, would that be breaking the rules? Are you still an "indexer" or have you crossed into the evil "active" territory?

This "indexing" stuff is getting more complicated all the time!