How to Beat the Market

Here’s an interesting piece by Morningstar – the most recognized company to “rate” mutual funds.  Morningstar did a report to determine if an active fund is adding value or not.  They call it their “Box Score Report” (referring to style boxes).

Overall, only 36% of active funds exceed their style indexes – added value. The report also goes on to show that expenses and taxes greatly degrade fund performance. Another interesting note is that active fund managers tend to outperform in poor performing areas of the market, but in “hot” areas they tend not to keep up with the index.

Interesting, the report does not address a more important question – how could one KNOW that information in advance – ie. which ones were going to outperform in the future.  

Research shows that 94% of an investor’s return comes from their allocation (stocks / bonds). The vehicle type to achieve returns becomes less important. You want to achieve returns with the least amount of risk and the least amount of cost.

On top of that, the risk of under-performing is much greater than the reward one gets for exceeding the index return.  There are funds out there that add value – the question to ask is can you identify them in advance? If you’re wrong, is it worth the risk? (ie. if you underperform dramatically, will you be able to recover).

Overall, there is really nothing new, just a reminder that low cost passive investing should have a place in everyone’s portfolio. This report supports our investment philosophy of maintaining a diversified portfolio, keep cost low and always invest for the long term.

Here’s a Link to the full report.