Are you investing the right way?

When we are young, we are taught in science classes that you should develop a theory, test it and see what the evidence shows. If the evidence is convincing, the theory is assumed to be correct.

If you continue to test your theory, you will gather more evidence. Over a long period of time, greater evidence should make you more confident in your theory.

In investing, the theory that most actively managed mutual funds and money managers do not consistently beat their respective benchmarks has been repeatedly been tested. The evidence is conclusive, over a long period of time and by many studies. (An actively managed mutual fund is one in which a manager picks stocks based on their research and predictions of the future.)

“Measure for Measure, Index Funds Rule,” in Sunday’s New York Times Business Section, highlighted more evidence. In his “Strategies” column, Jeff Sommer provided very convincing data based on the research studies performed by S&P Dow Jones Indices. This again confirms that our firm’s investment philosophy is more effective than using actively managed mutual funds. Some of the highlights:

  • Over the three years ended December, 2014, the S&P 1500 beat 76.8% of the actively managed US stock funds.
  • Over the five years, the index beat 80.8% of the actively managed US funds.
  • Over 10 years, the index beat 76.5% of the actively managed US funds.

Sommer concludes that “this underperformance (by actively managed money managers) has persisted year after year.”

Since our firm’s inception, we have consistently recommended very low cost index-like funds. The senior director of global research at S&P Dow Jones said “fund cost is the most important single factor predicting performance. It makes it harder to beat index funds, which tend to be cheaper.”

Sommer finished his column with this statement: “Some funds do beat the indexes each year. But, costs aside, it’s exceedingly difficult to pick the funds that will outperform in the future. Whether investors should even try remains an open question.”

This study, and many like it, continue to provide real-world evidence that to design a successful investment portfolio, you should structure a globally diversified portfolio based on the core principles that we adhere to.

This should give our clients confidence.

If you are not a client, and you are using actively managed mutual funds, should you be questioning your investment strategy? What more compelling evidence do you need to change?


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