How To Beat 90% Of Mutual Fund Managers In The Long Run

MJG

Hi Guys,

That's really an eye-catching title. It is sure to win a wide readership. It did exactly that with me.

Many techniques and schemes exist to beat Index returns. However, overtime, most of them fail. One favorite method is to use market timing signals, but market " timer's Hall of Fame is an empty room." That is a quote from financial author Jane Bryant Quinn. It is an accurate summary of an industry that hasn't deliver on its promises.

If Ted posted this reference earlier I apologize for this repeat. But I just discovered it, and it summarizes much actionable historical data in a few well constructed thoughts. I hope you visit this Link:

https://www.forbes.com/sites/trangho/2017/04/12/how-to-beat-90-of-mutual-fund-managers-in-the-long-run/#211dc2074257

So most active fund managers don't score well when contrasted against their Index targets. That's not a shocking outcome. In fact, given the expenses of doing that task just about guarantees that shortfall conclusion. Indeed, most will and do fail.

A 90% headwind is a tough challenge for me also. I suspect it is equally difficult for most MFOers. The bottom line is that most of us would do better in the investment universe if we simply defaulted into Index products rather than trying to outdistance the Indices. Our failure rates are just much too high in terms of the returns shortfalls and the time we commit to this losing game. Of course, exceptions exist and some of those rare exceptions post here (or are they miscalculating or misrepresenting their results?).

Enjoy the article.

Best Regards

Crash

Pay-wall. Ad-Blocker blocker. Pus brains.

BrianW

The title of the article is eye catching, but I fear there's more to it than the article seeks to address. I've always asked the question of indexers: how do you create your asset allocation? Do you just merely grab an S&P 500 index or Total market fund and call it a day? If yes, doesn't this ignore the fact that overtime Value beats growth, Small beats large. Also, I believe the number one mistake made by investors is buying at the wrong time (top) and selling at the wrong time (bottom). If you start out with an index fund, you may begin with a beta/alpha of 1 (before adding satellite funds). When things are screaming upward (as they have since 2009), you'll feel rather good about your brilliance. But, I imagine that when we have the next correction, the indexers will not ride it out. I imagine they'll repeat the same pattern of behavior. Not saying that low beta investors are necessarily smarter. I just believe there's less incentive to do something stupid.

MJG

Hi BrianW,

Indeed there is more to investing than the title of the referenced article suggests. I suspect the author did not plan to be all inclusive in his brief presentation. He addressed one aspect of the investment process.

It all begins with a commitment by an individual to save. That's the start of a process that includes an asset allocation decision. In the investment hierarchy, the asset allocation decision precedes the decision to adopt a low cost Indexing decision. Here is a Link to an article that addresses this process:

http://www.investmentu.com/content/detail/gone-fishin-index-fund-portfolio

Note that in the " gone fishin" portfolio illustrated in the article, a respectful commitment was proposed for those investment categories that you also recommended. The S&P 500 alone is not a balanced portfolio.

A high fraction of my portfolio is indexed components, but I also own some actively managed elements. I suspect that is very common among MFO participants. I'm inclined to patiently rideout market swings. I suspect that too is common among MFOers. Patience wins many games, especially when investing.

I agree that some Indexers will overreact to market corrections, but some will not. That general observation is likely to be representative of the public investors writ large. There will be a mix of reactions indepemdent of whether the investor iis actively or passively inclined.

Thank you for your contribution to this discussion.

Best Wishes

BrianW

@MJG: thank you.

BrianW

The last article you posted (gone fishin). Is much more interesting! I've created my Morningstar portfolio to watch it perform. I'll also play around with it using ezbacktest. Thanks again.

DavidV

Any index is a portfolio of stocks, selected by using some rules. I am wondering what is so special about S&P 500 index, that it is very difficult to beat its performance. It seems to me that, at least theoretically, it is possible to create another index that consistently beats S&P 500. One example is CAPE index that showed outperformance for the last 15 years. Probably some smart ETF try to accomplish that, but I am not sure whether they are successful.