Want to beat your friends and basically every professional active investment manager? Buy an index fund and don’t touch it for 15 years. The numbers below are shocking, and explains why investors are flooding into index funds.
Let me break down these long-term numbers for you:
- 7% of large cap funds beat the S&P 500 index over a 15 year period. In other words, you are crazy to even consider using an active manager to manage your large cap stocks. Honestly, you think that you can identify and pick the one manager out of 14 that can beat the market?
- 1% of small cap growth and 4% of mid-cap growth funds beat their index over a 15 year period. And you thought weathermen were the only ones that can be right 1% of the time and keep their job.
- The common thought has been that small and mid-cap managers should do a bit better because there is less information available and more research should result in better performance. Yet, only 3% of mid-cap and 4% of small cap core managers beat their index over 15 years
- The best chance to beat the index over the long-term is with a small cap value manager. Still, you can only pick the right manager about 20% of the time.
The active managers keep telling us to be cautious of the upcoming “index bubble”. Just a reminder that just 9 years ago the large cap, mid-cap, and small cap index went down by around 50% each. Still these indexes are crushing the active managers. Just think about the fact that you can beat 90% of professional investors by simply buying an index fund and not opening your statement for 15 years. Kids, want a job in which you can completely fail and still make a ton of money? Be a portfolio manager for a mutual fund.