What's the justification for Mutual Fund Management?

Question

80% underperform the Dow
15 % perform at the Dow level
only 5 % and you will never find out who, until afterwards, outperfom the Dow
Above numbers, after adjustment for fund costs

Answer 1

Well, according to the academic studies, there is little justification for active fund management. Mutual funds are designed to capture the systematic risk/return of the market, so theoretically they should not be able to beat this market average. Unfortunately, actively managed firms have a lot of money to advertise and so many investors never get a chance to even hear about the academics of investing.

This is why the largest pension funds in the world index their entire portfolio. If its good enough for them, it's good enough for me.

Answer 2

Takes those numbers with a grain of salt. By the nature of mutual funds, they will slightly underperform their index because of management fees. Most will actually perform at Index before fees. If you look at the big picture, like 99% of the stock movement is due to mutual funds investing. Of course when you look at the numbers, you see the stock go up, but see the mutual fund slightly lag because of their fees.



I think many people prefer active management because they don't trust a computer 100% of a time. Would a computer managed index fund know to sell a stock in a crash? It'll just keep buying and holding stocks and only sell enough to pay the people cashing out because the one of the goals of the index fund is sole to minimize cash holdings. While a competant manager might realize it's a crash and change the funds strategy on a dime.

Answer 3

These numbers sound slightly off, they may be a particular time period. More normally 60% perform below market averages.

Let me make some important observations to put this into perspective.

First 100% of index funds underperform the market because of fees and the requirement to hold cash for redemptions.

Second, the median return on the market is below the average return on the market. This means that the majority of all investors perform below the market average.

Third, it is not true that you cannot predict which portfolios will outperform or underperform the market.

Fourth, performance relative to the market doesn't mean much. If you meet your goals then you meet your goals the market's movements then no longer matter.

I am an economist and one of the best investors in the world. I also participate in a stock market simulation so you can look at my performance to verify the claim.

http://www.marketocracy.com/cgi-bin/WebObjects/Portfolio.woa/ps/FundPublicPage/source=CaHiHdImDlIfEbAoMaKiAbOa

Managing money is ridiculously hard. That as many do as well as they do is quite amazing to me.

Answer 4

There is very little justification for there to be as much fund management as there is. Over the appropriate investment horizon for most to almost all investors, the actively managed funds game is a losers game. Something like 1 in 32 funds beat the S&P Index over 30 years. Actively managed funds simply have higher fees, more taxes, more money held in cash etc. Go with indexing and win.

Answer 5

That they are better stock pickers than you. But I doubt it.