Flipping a coin is a truly random event. A coin will land on either heads or tails, and guessing right is a 50-50 proposition. The performance of actively-managed mutual funds is not as predictable. Funds that perform in the top half of their peer group during a five-year period had a less than 50% chance of staying in the top half during the next five-year period, according to a recent S&P Dow Jones study. Investors have better odds flipping a coin than using past performance to pick winning managers.
David M. Blitzer is managing director and chairman of the S&P Dow Jones Index Committee. He has the overall responsibility for index security selection as well as index analysis and management. A graduate of Cornell University with a B.S. in engineering, Dr. Blitzer received his M.A. in economics from the George Washington University and his Ph.D. in economics from Columbia University.
Wall Street is always coming up with cunning new marketing techniques to attract tourist investors. These are less-sophisticated individual investors and advisers who are easily wowed by glitzy industry trends, only to abandon them when the strategy falls short of expectations. The latest spin to attract tourist money is “smart beta.” The phrase didn’t exist one year ago, yet a Google search today shows 190,000 results. The inference that investing this way is smart has ignited a strong interest among less-sophisticated investors while those who truly understand what’s behind these strategies find the phrase distasteful at best.
I am a phenomenal index fund investor because my diversified U.S. stock index fund is taking the S&P 500 index funds to the cleaners. My fund is beating the Vanguard S&P 500 Index Fund (VFIAX) by 1.0% year-to-date through November 30, and it’s up by more than 1.4% over the trailing one-year period. This isn’t […….]