Posted on 03/24/2025 8:43:28 AM PDT by JSM_Liberty
The results are in: this time is not different. Indexing remains the optimal investment strategy.
Every year S&P Global Ratings publishes reports comparing all actively managed investment funds with various stock indices. These reports are considered the gold standard for evaluating the performance of active fund management with their index-fund alternatives.
The bottom line from the year-end 2024 report out this month is that there were no surprises. US passive index funds in 2024 outperformed about two-thirds of actively managed funds. That is consistent with past results that also show that one-third of the managers who outperform in any single year are generally not the same as those who win the comparison in the next.
When you compound the results over 20 years, about 90 per cent of active funds produce inferior returns to low-cost index funds and indexed exchange traded funds. Equivalent long-term results were recorded for funds focused on developed economies, emerging markets and bonds. Even for small-cap funds, which had a good 2024, only 11 per cent outperformed over the past two decades.
It is not impossible to beat the market, but if you try, you are more likely to achieve the returns of the bottom 90 per cent of active managers. The evidence gets stronger every year: index fund investing is an optimal strategy for the ordinary investor.
Despite the evidence, many active managers argue that the future will be different. One common view is that the popularity of passive investing has created an unhealthy concentration of stocks in the popular indices and has made indexing an increasingly risky strategy. A second argument championed by some active managers is that index investors pour money into the market without regard to company earnings and growth opportunities. This compromises the ability of the market to reflect fundamental information, creates mispricing and thus permits active managers to use their skills to outperform in the future.
It is certainly correct that the market is highly concentrated. A few technology stocks (known as the Magnificent 7) have had a one-third weight in the S&P 500 index and were responsible in 2024 for more than half of the market’s 25 per cent total return. But such concentration is not unusual. In the early 1800s, bank stocks represented about three-quarters of the total stock market value. Railroad stocks constituted much of the total market value in the early 1900s, and internet-related stocks dominated the index in the late 1900s. And it is far from unusual for a small percentage of stocks to be responsible for most of the market’s gains. A study by Hendrick Bessembinder found that only 4 per cent of publicly traded US stocks have accounted for virtually all of the US stock market’s excess returns over Treasury bills since 1926. A concentrated market is not a reason to abandon index funds. Owning all the stocks in the market will ensure that you own the few stocks responsible for most of the market’s gains.
A second “this time is different” argument against indexing is that index funds have grown so fast that it has interfered with the market’s ability to price stocks even nearly correctly and to accurately reflect new information. Some have suggested that the growth of passive indexing has generated stock market bubbles such as the current boom in AI-related stocks. More investing without regard to fundamental information will enable active managers more easily to beat the index in the future.
There are logical and empirical reasons to reject such claims. Even if 99 per cent of investors bought index funds, the remaining 1 per cent would be more than sufficient to ensure that new information got reflected in stock prices.
And if one believes that bubbles will enable active managers to outperform, consider the data for the internet stock boom that expanded until 2000. Many internet-related stocks sold at triple-digit earnings multiples, far higher than the current valuations of today’s favourite AI stocks. SPIVA data shows that during 2001, 2002 and 2003, 65, 68 and 75 per cent of active managers underperformed the market in each of these “post-bubble” years.
The evidence grows more compelling over time. The core of every investment portfolio should be indexed and diversified across asset classes. Indexing will assuredly result in low fees and low transaction costs, and it is tax efficient. Index funds are also boring, and that may be one of their greatest advantages, less vulnerable to the waves of optimism or pessimism that characterise the financial news. As the white rabbit in the film Alice in Wonderland advises us, “Don’t just do something, stand there.”
They also tend to have lower expenses.
The stock market is a vehicle by which money is transferred from those without patience to those with patience.
Sound advice for anyone at any time - IMHO.
I would add that patience plus diversification are needed ingredients for success in the market.
“The stock market is a vehicle by which money is transferred from those without patience to those with patience.”
Truth, and the temptation to trade never goes away.
My portfolio has outperformed the market over the past 25 years by a substantial amount. I own 15 stocks, all of them household names (Coke, PG, Morgan Stanley, Aflac) that pay dividends and increase their dividends every year. When I have $$ to invest, I look at the 2 or 3 stocks in the portfolio that are getting hammered, and I invest in those stocks. Unlike actively managed funds, I don’t have to worry about a Morningstar rating. That’s why these funds underperform the average, i.e., b/c fund managers need short term results, so they join the investment pack, resulting in average returns, which become below average when their 2% cut is taken out. By contrast, I put my $$ in beaten down stocks (which have decades-long track records of delivering returns), and I can patiently wait for them to recover and prosper. Or, more simply, buy low and don’t sell.
Avoid expensive fees and you are far ahead no matter what your strategy:
https://www.reddit.com/r/Bogleheads/comments/pjxu6t/pay_attention_to_fees/
Buffett’s investment advice to his wife when he passes: 10% short term govt bonds; 90% S&P 500 fund.
Sound advice for anyone at any time - IMHO.
___________________________________________________
The best investment advice is to not buy mutual funds, unless you are absolutely uninterested in managing your own money. These funds take almost 2% off the top, which makes it virtually impossible to outperform the market over time. I own 15 stocks through DRIPs(Dividend Reinvestment Plans), all of which are blue chip. Mutual fund managers, in order to keep up their ratings, have to join the pack, so they buy what everyone else is buying. By contrast, I dump $$ into the 2 or 3 of my worst performing blue chip stocks and can wait for the turn around. My portfolio is simple and, over time, has significantly outperformed the S & P and DJIA. Buy, never sell, and reinvest the dividends.
Avoid expensive fees and you are far ahead no matter what your strategy.
_______________________________________________
Agreed. However, even unsophisticated investors (like me) can make a lot more money by owning their own stocks. The key is to buy stocks that have raised their dividends for decades. If a stock always raises its dividend, its value must go up, b/c investors will buy the stock for the higher dividend payment and also b/c the company must be fairly consistently raising its profits. I bought Exxon at around $30/share (with a 10% yield) during COVID, when everybody was telling us it was the end of Big Oil. I’ve made an annual 10% return for 3 plus years in the form of dividend checks, and the stock is sitting around $115/share now. A mutual fund manager would not have taken this risk, b/c they need short-term gains.
“These funds take almost 2% off the top,”
Index funds expense ratios are about a tenth of that
Vanguard VOO (S&P500 etf) expense ratio: 0.03%
I see you enjoy managing stocks. Many like myself, appreciate the instant diversification an S&P 500 fund offers. It's not sexy, but for those who prefer not managing individual stocks, it's a easy choice.
Both are right. Many 401k offerings don’t include the dividend champions, so a general index may suffice.
No matter how nice your company it seems wise to also try and have a separate fund esp with how many low-cost brokers are around. A bort strategy or just a low-load fund of dividend payers (e.g. VYM) is not exciting but adds up if you “DRIP” it into itself.
(disclosure: I don’t own VYM. I picked it as an example because it’s not one I own. Do your own homework please.)
Managed funds are a waste of good money. This report proves it again. The managers are not worth what they are paid.
Lower? Closer to NOer expenses by comparison. MF managers don’t earn their keep.
You don’t get much more diverse than a market ETF.
Dividend Aristocrats.
There are no brokers or advisors that do not have a conflict of interest. NONE.
Agreed—the entire “investment advisor/management industry” is a total joke.
The only exception I would make is that high net worth/income individuals with major tax issues probably should hire an advisor on tax strategy—and pay them by the hour for a periodic review.
“many active managers argue that the future will be different”
And how long have they been saying this? About as long as there have been index funds from what I have seen.
bfl
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.