The Personal Finance Lifeline: September 2009

From NYT and Standard and Poor's:

"Over the five years ended June 30, only 37.1 percent of actively managed funds made up of large-capitalization stocks beat the category’s benchmark, the S.&P. 500. Most large-cap investors would have done better with a plain old S.&P. 500 index fund. "
"Only 26.6 percent of managed mid-cap funds beat their index, the S.&P. 400, while 42.6 percent of managed small-cap funds beat the S.&P. 600."

"S.&P.’s look at funds containing foreign stocks covered four very broad categories, and generally showed that only a small minority of managed funds beat the benchmarks."
"The study, which looked at 3,500 managed funds, reinforces the findings of many past studies by the S.&P., other firms and academics. Over time, the average active manager simply cannot pick enough market-beating stocks to offset the high cost of running the fund. Most indexers carry expense ratios of less than 0.2 percent, while most managed stock funds charge more than 1 percent, five times as much. Indexers’ smaller fees leave more money in the account to compound, making a big difference over the years."

But the actively managed multi billion dollar industry disputes these findings:

"Lending some support to their view, S.&P. noted that on an “asset-weighted” basis, managed funds matched or beat their benchmarks in “most categories except mid-caps and emerging markets.”

The author also questions if the average investor actually gets these returns and if the added risk is worth it:

"Marketing on the basis of recent performance can be a dirty trick, drawing investors in too late to share in the big gains."
"The average investor therefore does much worse than the investor who buys a block of shares and hangs on through thick and thin."
"If your long-term plan calls for annual stock returns averaging 7 percent, and you think you can get that with a low-fee S.&P. 500 indexer, is it really worth a lot of trouble to shuffle your money among a sequence of managed funds you expect to return 7.5 or 8 percent."

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The Personal Finance Lifeline