I don't expect to change your mind, ArtG, but I believe you are wrong.
To restate my basic position (and it s one held by many others): Sure, some managed funds will outperform their relevant indexes. It's got to be that way. However, very (very) few will outperform their indexes on a risk-adjusted basis over a period of years. In fact, the number which do so is what would be predicted by random chance. An investor's ability to predict which managed funds will outperform,
and when they will stop, is no better than chance. Thus, it is not worth paying the extra expenses of a managed fund.
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"In a study of equity mutual funds, Elton, Gruber, Hlavka and Das examine all funds that existed for the period of 1965-1984, 143 funds in all. These funds are compared to the set of index funds—big stocks, small stocks and fixed income—that most closely correspond to the actual investment choices made by the mutual funds. The result: on average these funds underperform the index funds by a whopping 159 basis points a year. Not a single fund generated positive performance that was statistically significant. In the most recent and comprehensive study done to date, a dissertation at the University of Chicago, Mark Carhart studies a total of 1,892 funds that existed any time between 1961 and 1993. After adjusting for the common factors in returns, an equal-weighted portfolio of the funds underperformed by 1.8% per year." (from a speech by Rex Sinquefeld, link below)
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So, these fund managers, who spend all their days trying to beat the market with the benefit of millions of dollars of resources can't consistently do it. But, somehow, an investor is supposed to believe he can discern the most talented ones, the ones who will be successful despite all the odds? And this investor is supposed to have enough faith in the strength of his prediction that he is willing to plunk down his retirements savings based on this judgement? And, be charged .5% to 2% each year for that privilege?
Anecdotes of one person or another person's experience are largely immaterial. My cousin won the lottery--does that mean he is a skilled lottery player? Does it mean I should pick the same numbers he picks? Does it mean playing the lottery is a good idea?
Fact: Most managed funds in most categories underperform their relevant index most years.
If you are interested in some good reading on the subject, I recommend:
- The book "Bogle on Mutual Funds"
- The article at:"
Active vs. Passive Management
(Rex Sinquefeld's quote above came from this piece.)
- The book "The Intelligent Asset Allocator" (William Bernstein)
But, I am happy that there are stock pickers and those who believe that active management of mutual funds is worth the cost. The activities of these individuals is what keeps the market efficient, and what allows indexing to work.
It is worth noting that most people who now believe in passive management/indexing once believed as you do now. I used to. Then, I got this little thingy installed in my head . . .