Advisor Perspectives: Most Investment Pros Can’t Beat The Market

Johnny HopkinsLarry SwedroeLeave a Comment

In his latest article titled – The Suckers At The Investment Table, Larry Swedroe discusses new research that shows most professional investors can’t beat the market. Here’s an excerpt from the article:

New research confirms that institutional investors, such as mutual funds, outperform the market before fees, and they do so at the expense of retail investors. That is bad news for retail investors and for investors in active mutual funds, who underperform after fees.

Warren Buffett famously warned investors that if you cannot value businesses “far better than Mr. Market, you don’t belong in the game. As they say in poker, ‘If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.’” The evidence makes clear that, on average, the patsies are retail investors. That makes trying to outperform the market through individual security selection or market timing a loser’s game for individual investors – just like at the roulette wheel, while it’s possible to win, the odds are so poor that you shouldn’t play. However, it’s also a loser’s game for actively managed fund investors.

The evidence from the annual S&P Indices Versus Active (SPIVA) Scorecard, which compares the performance of actively managed equity mutual funds to their appropriate index benchmarks, shows that regardless of the asset class, year after year a large majority of actively managed mutual funds underperform and that there is little to no persistence of outperformance beyond the randomly expected.

In addition, studies such as “The Selection and Termination of Investment Management Firms by Plan Sponsors” have found that while pension plan sponsors hire investment managers after those managers earn large positive excess returns up to three years prior to hiring, post-hiring excess returns are indistinguishable from zero; and if plan sponsors had stayed with the fired investment managers, their returns would have improved. In other words, while fund managers have sufficient skill to exploit retail investors and generate alpha, they don’t have sufficient skill to overcome all their costs. Thus, fund investors are the losers in that game of active investing, and the fund sponsors are the winners.

You can read the entire article here:

Advisor Perspectives: The Suckers at the Investment Table

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