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Can Investors Use The Track Records of Managers or of Mutual Funds to Select the Best Managers?

Seth Jentner05/08/2012

Over 5, 10 or even 15 years, there will typically be somewhere between 5% and 20% of managers who will beat the market. Unfortunately, no one knows in advance who the "winning" managers will be.

Some people think that picking a recent top performer is best, as they think they can perform well again. But there is statistically no greater probability that they will repeat that strong performance over the next decade.

If we compare investment managers and mutual-fund managers against an appropriate index, such as the S&P 500 Index, to see how well they are doing, we see that roughly 80% of these managers underperform that benchmark index. So there’s a 4 out of 5 chance that your manager will underperform the market. Are those odds you’re willing to play?

So why not invest into an index fund that attempts to match the benchmark rather than trying to beat it?

The advantages of investing in an index fund include:

  • Broad diversification into hundreds or even thousands of stocks and bonds.
  • Very low internal management fees, typically only 10% to 20% the cost of actively managed accounts.
  • The ability to outperform 80% of investment managers.

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