Friday, August 18, 2006

More on (not) outperforming the stock market

In a previous post about GIC, I discussed the misguided belief that an investor can consistently outperform the market. In short, I wrote that there are no opportunities to make easy money, even for the shrewdest of investors, when there are many others searching for these same opportunities. Recently, I came across this passage from Charles Wheelan's naked economics:

According to Morningstar, a firm that tracks mutual funds, roughly half the U.S. actively managed diversified funds beat the S&P 500 over the past year. Look what happens as the time frame gets longer: Only 30 percent of actively managed funds have performed better than the S&P 500 over the past five years, and only 15 percent of such funds have done so over the past twenty years. In other words, 85 percent of the mutual funds that claim to have some special stock-picking ability did worse over two decades than a simple index fund... (his emphasis)
Bottom line: be very skeptical of anyone who claims that an investor can outperform the market consistently.

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