Mar

21

 A rather shocking study which shows that investors in mutual funds receive a much worse return than the actual return shown by the mutual fund through putting most of their investment in before the mutual fund goes down and least of their investments when mutual funds before the mutual fund goes up. The actual underperformance seems to be of the order of 3 percentage points of return a year, i.e, 6% versus 9%, with sector funds and specialty funds and growth funds showing much greater underperfomance. This must be a pretty good indicator of when to go against a particular sector.

Steve Ellison writes:

I read Mr. Swedroe's book Rational Investing in Irrational Times. This is very interesting data, but it undermines his main message, that the market is efficient and even professional managers can't beat it, so you should diversify and keep costs low by buying index funds. If mutual funds favored by the public underperform by a wide margin, something else must be overperforming. One might be able to beat the market by simply avoiding the hot funds and their favored stocks, like Bacon's technique of betting on all the other horses besides the overpriced favorite.

Mick St. Amour writes:

A great contrarian indicator. The retail investor is often guilty of chasing returns and as you can see this is a performance killer.

Larry Williams writes:

Aha, mutual funds are for the masses, while the elite managers of money: Cohen, PTJ, Dalio– are the winners for their clients. 

But hold on a moment here. Lots of professional managers have beat the market for many, many years. It can be done, and it is being done. But not all can do it. Just like not all teams will be in the final four, and while luck is part of the game, in the end skill carries the day. 


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1 Comment so far

  1. Ronald Weber on March 21, 2011 3:53 pm

    2 Comments:

    1)
    Most institutional investors are obsessed about beating their benchmarks, but few question whether traditional cap-weighted benchmarks really make sense.

    2)
    Probably that most fund managers can’t beat their cap-weighted benchmarks because of career-related issues. It might sometime take years for your strategy to bear fruits, long enough to loose your job. Had you overweighted value stocks, utilities and commodity-related names in 1998 you would have gone trough a very long three years before finally catching up. Unless you’r a true investment legend who has the luxury to sit and wait, most investors don’t have that much patience to wait for your success.

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