http://www.gregkarp.com/blog/2009/04/22/indexes-trump-managers%e2%80%a6again/
Adding to the pile of evidence that you can’t beat the market was a Standard & Poor’s study released this week. It found that over the five-year period from 2004 to 2008, the S&P 500, a popular index for big-company stocks, beat 71.9 percent of actively managed funds, those who employ a stock-picker. That’s especially striking, considering those high-paid stock-pickers are supposed to be able to trounce the general market during a recession.
Among funds that held medium-sized company stocks, 75.9 percent lost to the index. (S&P MidCap 400). The story is even more profound among small-company stocks. The index, S&P SmallCap 600, outperformed 85.5 percent of funds that concentrate on small companies. Results were similar for the five-year period from 1999 to 2003, Standard & Poor’s said. Same story with funds that hold stocks of international companies.
“But,” you might think, “I’ll just choose a fund whose manager is in the 18 percent who beats the market.” How will you do that? Research shows that top performers one year tend to be next year’s poor performers. How will you know in advance which funds will outperform this year? You can’t know, and neither can anybody else. It says so in every financial document you read – you know, that thing about how past performance has nothing to do with future returns.
When you hire a professional and pay a premium price, as you do with actively managed funds, you’re supposed to get superior results. Otherwise, why pay more?
Why, indeed.
Adding to the pile of evidence that you can’t beat the market was a Standard & Poor’s study released this week. It found that over the five-year period from 2004 to 2008, the S&P 500, a popular index for big-company stocks, beat 71.9 percent of actively managed funds, those who employ a stock-picker. That’s especially striking, considering those high-paid stock-pickers are supposed to be able to trounce the general market during a recession.
Among funds that held medium-sized company stocks, 75.9 percent lost to the index. (S&P MidCap 400). The story is even more profound among small-company stocks. The index, S&P SmallCap 600, outperformed 85.5 percent of funds that concentrate on small companies. Results were similar for the five-year period from 1999 to 2003, Standard & Poor’s said. Same story with funds that hold stocks of international companies.
“But,” you might think, “I’ll just choose a fund whose manager is in the 18 percent who beats the market.” How will you do that? Research shows that top performers one year tend to be next year’s poor performers. How will you know in advance which funds will outperform this year? You can’t know, and neither can anybody else. It says so in every financial document you read – you know, that thing about how past performance has nothing to do with future returns.
When you hire a professional and pay a premium price, as you do with actively managed funds, you’re supposed to get superior results. Otherwise, why pay more?
Why, indeed.
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