I’ve been a tennis player my whole life. At one time, I was pretty good. Now I’m a better than average club player. While I can fantasize about what would happen if I played against Roger Federer, I know the reality. I might get a point (if he double-faulted), but that would be the most I could expect.
In sports, and in most other areas of human endeavor, amateurs don’t stand a chance against “pros.”
Here’s an anomaly few appreciate. Investing is different. Not only can the average Main Street investor outperform the “pros,” it’s likely she will do so.
How can this be?
Financial journalist Larry Swedroe looked at the performance of two leading consultants to pension plans and investment advisors, SEI and Russell. These mega firms get paid handsomely to identify outperforming active fund managers prospectively. They also actively manage their own mega active mutual funds. SEI manages $94 billion in assets. Russell manages about $40 billion.
The resources of these firms permit them to analyze every variable available in their effort to find mutual funds that will “beat the market.”
How have these elite professionals performed?
Over the 17-year period from 2000-2016, actively managed funds from both firms underperformed comparable passively managed funds managed by Dimensional Fund Advisors in every asset class.
Think about the ramifications of this analysis. Huge pension plans, among others, rely on SEI and Russell to beat the returns of passively managed funds like Dimensional. Yet their track record indicates a shocking inability to do so.
Pension funds may be reluctant to abandon active management because the quest for outperformance justifies the existence of large, highly paid internal staff. As an individual investor, you have no such constraint.
If your broker or advisor is telling you he can “beat the market,” ask this question: What do you know that SEI and Russell don’t?
Then run for the door and find an advisor (or do it yourself) who will switch your portfolio to low management fee index funds, passively managed funds or exchange traded funds.
I highly recommend this blog referenced above written by Larry Swedroe. I particularly like this quote he attributes to famed economist, Paul Samuelson: “[A] respect for evidence compels me to incline toward the hypothesis that most portfolio decision makers should go out of business—take up plumbing, teach Greek, or help produce the annual GNP by serving as corporate executives. Even if this advice to drop dead is good advice, it obviously is not counsel that will be eagerly followed. Few people will commit suicide without a push.”
Not getting Dan's weekly newsletter? You can sign up right here.