wallstchristmasI was on vacation during the summer of 2008 when I picked up a Saturday edition of the New York Times and stumbled across a column by Mark Hilbert. He was summarizing an academic study that confirmed what I already understood from experience and from reading dozens of books and articles on the topic: Over time most mutual funds don’t beat their respective benchmarks and its impossible to pick the one that may outperform ahead of time. Everything an investor needed to know was in these few short paragraphs.

And, it was supported by an academic study, not research by a Wall St. firm.

Do yourself a favor and commit the following excerpts to memory:

HOW many mutual fund managers can consistently pick stocks that outperform the broad stock market averages — as opposed to just being lucky now and then?

Countless studies have addressed this question, and have concluded that very few managers have the ability to beat the market over the long term. Nevertheless, researchers have been unable to agree on how small that minority really is, and on whether it makes sense for investors to try to beat the market by buying shares of actively managed mutual funds.

A new study builds on this research by applying a sensitive statistical test borrowed from outside the investment world. It comes to a rather sad conclusion: There was once a small number of fund managers with genuine market-beating abilities, as judged by having past performance so good that their records could not be attributed to luck alone. But virtually none remain today.


Whatever the causes, the investment implications of the study are the same: buy and hold an index fund benchmarked to the broad stock market.

Professor Wermers says his advice has evolved significantly as a result of this study. Until now, he says, he wouldn’t have tried to discourage a sophisticated investor from trying to pick a mutual fund that would outperform the market. Now, he says, “it seems almost hopeless.”

Here is a link to the full column:

The Prescient are Few