A recent S&P/Dow Jones Indices study came to the conclusion that those well-dressed, highly-compensated mutual fund managers (whom you and I are paying) – with all their research, glossy brochures, and inside access – aren’t all they’re cracked up to be.
The study, titled “Does Past Performance Matter” – concludes that only 2 of 2,862 mutual funds outperformed their peers consistently over five years. That means the performance of the mutual funds in your 401k, your Big Brokerage investment account, and most others, are a matter of blind luck, not investing skill.
One of the study’s authors, William D. Nordhaus put it this way. “The results were actually very close to what you’d find in a random draw – or a series of coin flips, except they were a little bit worse.”
Princeton Finance professor Burton G. Malkiel says that, “taken to its logical extreme, it means that a blindfolded monkey throwing darts at a newspaper’s financial page could select a portfolio that would do just as well as one carefully selected by experts.”
When pressed on the matter, Keith Loggie, senior director of global research and design for the S&P said, “We’re not assuming that it’s pure luck. We don’t know what it is.”
So what can you and I do with this depressing information?
First – stop believing in the tooth fairy. Selecting stocks or mutual funds – thinking that we’ll out-fox our neighbor is fantasy. Why not consider starting out with the 1-2% annual head start a boring index fund has over the mutual fund managers based on the fee differential alone?
Want to take it one better? How about looking at an equity index strategy with a floor earnings rate – and a capped earnings rate?
A floor and cap strategy means you’ll never lose if the market goes down. That in itself gives you an advantage over the market – and means that you’ve taken “chronological luck” out of the equation – the chance that retirement will catch you at a time when the market is at a low ebb.
There are a myriad of other strategies, vehicles, and accounts you might consider. The real point is to ignore the hype and chest-pounding of mutual funds – they’re just not that relevant.