Most Stock Pickers Stink. Here's a Smarter Way to Invest

Apr 13, 2017

If you entrust your money with professional stock pickers — fund managers who try to use their investing acumen and research skills to outperform the stock market — you're likely to be sorely disappointed.

In each of the past seven years, the vast majority of actively managed mutual funds that get paid to beat the S&P 500 index of U.S. stocks fell short of the mark, according to the latest report by SPIVAS&P.

Worse still, professional investors not only disappoint in the short run, they fail to earn their keep in the long run too. Over the past 15 years, more than 92% of all funds that invest in large U.S. companies lost out to their market benchmarks, the first time S&P has tracked this long of a time horizon.

"The longer time horizon provides a complete market cycle to measure the effectiveness of managers across all categories," noted Aye Soe, managing director of global research and design at S&P Dow Jones Indices, making active investors relative under performance all the more embarrassing.

The study's findings serves up yet more ammunition for the growing throngs of supporters of index investing, a strategy that calls for simply buying and holding low-cost index funds that in turn buy and hold all the securities in a given market — rather than trying to beat the market through stock selection.

The pro-indexing crowd is now a diverse and disparate bunch that includes Warren Buffett, Yale endowment chief David Swensen to motivational speaker and CEO whisperer Tony Robbins.

Robbins' latest book Unshakeable draws on conversations he has had with some the best-known investors in the world. It aims to coach the masses that trying to outperform the market is a loser's game. Better to be average through low-cost index funds and stay invested through the market's inevitable ups and downs.

Still, this doesn't mean that all actively managed funds led by stock pickers fail.

Daniel Wiener, editor of The Independent Adviser for Vanguard Investor, a monthly newsletter, looked at all Vanguard-run mutual funds that have been around for at least 15 years. Among this group, he found 14 U.S. actively managed funds that invest in the broad market that have beaten the Vanguard 500 index fund — which tracks the S&P 500 index of U.S. stocks — over the past decade and a half.

Among this group are some well known funds including Vanguard Primecap, and Vanguard Equity-Income, Vanguard Windsor II, and Vanguard Wellington, which is in our MONEY 50 list of recommended mutual and exchange-traded funds.

What do these funds have in common: Each fund charges investment management fees well below the category average. And each of these four funds is team managed.

Low costs and team management — which allows for consistent performance over time, as managers come and go — are two attributes that can lead to better-than-average performance among actively managed funds over the long run, MONEY has reported.

So while the typical low-cost index fund is almost always a better bet than the typical actively managed fund run by a highly paid stock picker, you shouldn't completely ignore all active options.

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