Fund selection: the fired beat the hired

Posted by TEBI on May 17, 2024

Fund selection: the fired beat the hired





Outperforming the financial markets by identifying what securities to buy and sell, and when, is very hard. To quote Mark Hebner in his award-winning book Index Funds: The 12-Step Recovery Program for Active Investors by now in its tenth edition: “Picking stocks or bonds is an ill-fated strategy that wastes time, energy, and money.”

Yes, there are bound to be a few winners, but the vast majority of ordinary investors who attempt it will fail. In fact, even professional investors, who devote their working lives to it, and have far more information and much better resources at their disposal than the rest of us, find it almost as difficult.

S&P Dow Jones Indices keeps a regular scorecard on the performance of active fund managers called SPIVA. Morningstar has something similar — the Active/Passive Barometer. What these scorecards tell us, time and again, is the most active managers underperform the market most of the time. Over meaningful time periods, only a small proportion of managers succeed. Nor does this just apply to fund managers in the U.S.; professional stockpickers all over the world have exactly the same problem.



This article is based on the book Index Funds: The 12-Step Program for Active Investors. The issues it raises are addressed in Step 5:





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The fundamental flaw of active ETFs

Six Lessons from A Random Walk Down Wall Street



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