Investors have more access to information about mutual fund performance than ever before. Greater disclosure and transparency is pushing the benefits of low cost index fund investing into the spotlight. The interest in index fund and ETF investing has never been higher and is expected to continue.
Medieval medicine and active fund management have a lot in common. They both have a success rate that’s based mostly on faith rather than scientific fact. Medieval medical “cures” and outperformance by active management can be attributed more to luck than skill.
Asset class diversification is a good thing because it lowers the potential for a large loss. However, diversifying actively managed mutual funds within an asset class is a bad thing because it decreases the already low probability for outperforming a comparable portfolio of all index funds. If you can’t buy index funds, then pick one active fund per asset class and hope for the best.
Mutual fund investors have a choice: invest in a portfolio of low-cost index funds or a portfolio of actively managed funds that attempt the beat the markets. What should we do? According to a new white paper on the subject, the odds favor an all index fund portfolio. The success of investing in individual asset categories by using low-cost index funds has been widely documented. However, surprisingly little research has compared the performance of diversified portfolios of index funds with portfolios of actively managed funds.
Give a monkey enough darts and they’ll beat the market. So says a draft article by Research Affiliates highlighting the simulated results of 100 monkeys throwing darts at the stock pages in a newspaper. The average monkey outperformed the index by an average of 1.7 percent per year since 1964. That’s a lot of bananas! [...]