We think deeply and often talk about our strategies to outperform the various markets, but our success rates are close to dismal. No, I’m wrong! They are dismal. Only about 5% of us manage to win this challenging task! Why?
We underestimate the many factors that both influence the complex marketplace while we consistently overestimate our abililiries to evaluate them. That is a recipe for disaster, and disaster is indeed the common ending. It seems like the less I try to outplay this game, the better I do. These days I just ignore the daily predictions and their predictors. This works for me. Trying harder generates poorer outcomes for me. What works for you?
Here is a Link to an article with a few insightful and interesting comments and statistics.https://www.aei.org/carpe-diem/more-evidence-that-its-really-hard-to-beat-the-market-over-time-95-of-finance-professionals-cant-do-it/
I especially liked the following paragraph:” Similarly, over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis.“
I wish you all successful investing and realize the huge odds against that global outcome. We can’t all be winners.
I understand the Index vs. Active discussion and I own some index funds. I agree that it's very difficult to have a portfolio that consistently beats the S&P over the long term.
Using MFO Premium ... let's take BFGFX as an example. The fund has been around for 14 years. It's +4.8 to the S&P over the life of the fund. It's APR has never trailed the S&P in it's history and last year it beat the S&P by 96.7 and +31.7 the year before.
Would it be safe to assume that this fund is part of the 3-5% that found a way to beat the S&P 500 Index (at least over the last 14 years)? What am I missing? Or is that the point? We won't be successful at trying to beat it over the long term. Genuine ?
It's a tired old debate that at best provides confirmation bias to those who want to believe it or just don't want to try to beat the market.
To wit: I own 11 dedicated, actively managed stock funds. All 11 easily beat-to-blow away their bogeys. 10 of 11 do the same vs the S&P, the only one being a SCV fund that I bought last year. This scenario has been the case with my port for about 40 years now.
When I say blow away, I mean blow away....
I don't own it any more, but take a look at FLPSX, which I bought near its inception and owned (as my only fund for about five years circa early 90's and) all the way up to the last couple of years.
Value of $10K, 12/27/89 to Current:
S&P 500 TR: $215,986
Note: There are no typos there and your eyes are NOT deceiving you.
True, LOTS of funds fail to beat their bogeys and many come nowhere close to matching the S&P. That's why statistically writers can truthfully pump out hair-on-fire (Thanks, Dick!) articles like these.
It's really not that hard to beat the market. Simply BUY the funds in the smaller percentile that ALWAYS do, or at least ALWAYS do over time.
Also, use of the word "NEVER" is usually not a good idea in these contexts. LOTS of PMs and analysts last year predicted Small Caps, Value, Foreign and EMs were places to be this year. So far, they weren't right, they were very right.
On reflection, never works was too strong a conclusion. I believe my proclamation should have been qualified with an almost never works statement. Never is too absolute. The real world is not that simple (I had to resist using never once.again). Thank you all for your insightful comments on this topic
I am in a constant learning mode. Wise investing is indeed a hard challenge that demands constant adjustment updates. Things are almost ( see, I do learn) never constant. Change happens.
I wish you all successful invest returns. Skill, but good luck is also needed.
What I'm saying is the funds that routinely beat their bogeys and/or the S&P are relatively easy to find because they pretty much do it ALL THE TIME.
FIND them. BUY them. Repeat.
HINT: Perform screens to identify the funds that are 5* funds for 3, 5 and 10 years, appear at/near the top of the screens in ALL of those columns and the 1-yr, YTD and Life of Fund columns. Dig a little deeper with your DD, especially regarding the PM(s), and select the very best.
Fido even assists investors by identifying "Fund Picks from Fidelity." You can probably even routinely beat their bogeys and/or the S&P if you just bought those.
But no, I'm not inclined to spoon feed them here. Several though are littered throughout my posts. If you swing and miss on one, not to worry as you likely blew away their bogeys and the S&P with the others.
Just don't EVER think you can pick THE ONE fund that's the best. Select 2-3 in each cat and if you did it properly, you very likely scored BIG on at least one or two of them. How many mistakes you think you could have made and STILL outperformed bogeys/S&P if you would have JUST bought and held FLPSX (see my prior post) from its inception?
Many investors have been coded to think that this is either impossible or will take too much of their time. And that's unfortunate.
In fact, if you include 2008 into any stock benchmark comparison and go until 2021, you probably won't find a single large-cap blend fund that beat the S&P 500 every calendar year. Even the best managers have fallow periods and performance tends to be lumpy. I doubt you've looked at the truly long-term history of most funds and I doubt you've made apples-to-apples comparisons for funds investing in similar style/size stocks to the benchmark. FLPSX is an exceptional fund, but it is not a fund to compare to the S&P 500, but to a mid-cap value benchmark currently and shifting benchmarks throughout its history, but almost never large-blend like the S&P 500 I bet. And it too has had lagging years versus its Morningstar benchmark, 2016 notably. In fact, if you look at the three-year period of January 1, 2014 through December 31, 2016 of FLPSX versus the IWS mid value index ETF, you would've seen IWS produce a 32% return versus FLPSX's 17%--a significant underperformance during a three-year period. And yet FLPSX remains a great fund.
VFIAX 27,452. Since I'm a tech-luddite I can't link to the screen. Maybe use 2 different funds in case 1 turns into the next Sequoia or Third Avenue Value !
The historical data suggests that outperformance on the plus side persists in the short term but ultimately it regresses to the average. Underperformance is far more persistent.
Here is a useful Link:
Here is a good summary quote from that article:
“The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers.”
Luck happens but doesn’t persist. Poor invest decision making does seem to persist unfortunately. It seems like the negative outcome always seems more robust. I wish good luck to all, even for the short term.
Ok, so if we ignore bonds (for diversification or income etc) and we just consider equity funds.
Is it not possible to find equity funds that consistently best the S&P 500 or TSMI on a long term basis? Not sometimes but consistently? Over 10-20 year periods. Maybe they miss 1 or 2 years but over the life... they beat the S&P. The BFGFX did for 14 years. I don’t own this fund.
That’s my goal. Identify and invest in mutual funds that outperform the S&P 500. Yes I look at APR vs peers BUT... if the smartest investors in the world like Buffet and Bogle... advise to just index... that’s my real benchmark. So, even though some funds may handily outperform their peers, if they don’t consistently beat the S&P and I’m not using it for diversification purposes (like a bond fund or allocation), then I look elsewhere. Thoughts on this strategy for equity funds?
Investors should be mentally prepared for active funds to periodically underperform their relevant benchmarks.
I agree with @LewisBraham that it is difficult to find active funds which will outperform their benchmarks over the long-term (10 yr, 15 yr, etc.). PDF
Many intelligent, highly-educated portfolio managers compete against each other.
Company* and stock market information is now readily available to all.
This makes it extremely challenging for anyone to gain an edge.
The higher costs of active funds are also an important factor since they detract from returns.
*Regulation FD was enacted in October 2000 to prevent selective disclosure of material nonpublic information. Link
If you choose some active LC growth funds and set and forget them for 15 years, 92.35% of the time you will be disappointed as they won’t beat their benchmarks. Since you and I own active funds, aren’t we saying that by using our tools, we think that we can maneuver in and out of these funds before we are disappointed and thereby beat the benchmarks? Not often - just when performance “consistently” underperforms.
I don’t mean to be simplistic, it’s just that I was an index only investor for a number of years and I’m constantly second guessing myself since owning active-despite positive results. This discussion and the feedback is helpful to me.
I do have one question. Is the index out-performance risk-adjusted?
Although a particular managed MF may not beat its bogie, it may provide downside protection and superior risk-adjusted returns.
I thought we were friends. I thought we were ALL friends at MFO. Lynn Bolin for example, shares and shares, as do so many others. You know of 11 funds that blow away their benchmarks, just make them look like fools, and you won’t share one? Not even one? I am sad!
Our government has tilted in that direction since the 1980s and I don't see any real difference in the current administration. In fact, I think the phrase "income inequality" is baked into the "in the long run stocks go up" thesis. So you may be right. In fact, in the other discussion on Grantham's bearish predictions being wrong one thing not discussed is a rather famous mea culpa he made a few years ago about not realizing how corporate power has grown in recent years so that monopolistic dominance that wouldn't have been tolerated in earlier eras is now permitted. That dominance is baked into the returns of bellwether tech stocks and the benchmarks themselves. In other words, there aren't too many search engines people use besides Google's. The fact that market-cap weighted index funds keep buying those bellwether tech stocks creates a kind of feedback loop, making them more powerful and driving their stocks even higher.