Monday, December 4, 2006

confirmation of better returns

Today’s Wall Street Journal had its monthly review of mutual funds (Section R). It certainly confirms yesterday’s post on the wisdom of crowds. In the table below, you can see that over the past twelve months, indexes (market averages) beat the professionally-managed mutual funds in three major categories, or segments, of the stock market: 1) the largest companies (i.e., large caps), 2) small companies (small caps); and 3) international stocks.

Might this be just an anomaly for one year? Okay, let’s look at the returns over the past five years. The indexes still win except in the small companies category.

Small companies are where you would expect that professional managers would do better since information is not as readily available publicly as it is for large corporations. Even given that, the average fund beat the market index by less than one percentage point. If you figure in the difference in management fees between index funds and managed funds, it would be a virtual tie.

It’s not talk. It’s not theory. It’s the facts.

Be blessed!


Anonymous said...

Johnny__M says:

Pretty convincing evidence. Especially considering that the past five years were a troublesome set of years for the investment world.

I.e. terrorism, gas prices, Enron (et. all), airline industry, etc.

If the indexes prevailed over the pros in that climate, I guess it's safe to extrapolate that they would better under any conditions.

Anonymous said...

Johnny__M also says:

Now, if we could just replace the Federal Reserve with a computer program to fix interest rates.

RB said...

The third largest mutual fund is an index fund, Vanguard 500 Index. The two largest ones are both from American Funds and they outperformed the index. Of the biggest eleven funds, seven are American Funds. Their performance has been outstanding over the years. See Wall Street Journal, Monday 4 December 2006, p. R6.

Anonymous said...

Johnny__M says:

Here's a question. Do you think an index fund is "cleaner" than, say, the American Fund that includes big tobacco.

Since we are hard pressed to think of a 100% "clean" investment, other than a tin can in the basement, an index fund is certainly more diluted than a mutual fund.

RB said...

An index fund actually buys the stocks like any other mutual fund. The only difference is that the index fund buys the same stocks, and in the same proportions, as the index (e.g., S&P 500).

There are "social responsibility" stock indexes and maybe some funds that match them. However, I don't know of any one index that is a sort of accepted benchmark for this category.

I'd just go with a good, respectable social responsibility fund. TIAA has one. American Funds probably does. There are actually a number of them out there.

Just realize that over the long-run a social responsibility fund is unlikely to outperform a more general index and more likely underperforms slightly. Sometimes tobacco and other socially-challenged businesses outperform the average.

Look to social responsibility as being its own reward and not a financial one in this life. :)