Trying to Beat the Market

The NY Times recently highlighted an academic study that estimates the proportion of mutual fund managers that can truly outperform the market. These types of studies have been conducted countless times, and all show that beating the market is very difficult. The results of this study using data from 1975 to 2006 are:

The researchers’ tests found that, on a pre-expense basis, 9.6 percent of mutual fund managers in 2006 showed genuine market-beating ability — far higher than the 0.6 percent after expenses were taken into account. This suggests that one in 10 managers may still have market-beating ability. It’s just that they can’t come out ahead after all their funds’ fees and expenses are paid.

With less than 1% chance of selecting a mutual fund capable of outperforming the market, I will happily put my money with low cost, index funds and ETFs. And if you’re picking stocks at home, do you honestly think you’ll do better than 99% percent of professional managers? It’s certainly fun trying, but I wouldn’t bet my retirement savings on it.

“The Prescient Are Few” by Mark Hlbert