This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Playing With Active Money Management Is a Losing Game

There are two things we know for certain about past performance: First, past performance is no guarantee of future performance. That's about the only thing Wall Street will tell you that you can take to the bank. And they are forced to tell you that. Second, past performance attracts lots of new money. The longer the string of performance lasts, the more money pours into the fund. And then the string runs out leaving the new arrivals to wonder what happened. How could this hero have lost his mojo? Perhaps he never had any in the first place. The record if full of stars that imploded costing investors billions as their funds got sucked into a black hole. I cite Bill Miller as one of the latest wonder boys banished in ignominy.

Peter Lynch is one star that bailed out at the top of his fame. He grew Fidelity's Magellan Fund from obscurity to the largest mutual fund on the planet. After his retirement he stayed on at Fidelity to nurture and mentor Fidelity's aspiring fund managers. If there was anybody who could pick a good fund manager it would be Peter Lynch. Yet the abysmal performance of Magellan Fund in the interim is mute testimony to the impossibility of picking winners in advance.

Across the entire universe of funds, active management costs investors from one to two percent compounded per year. We should expect under-performance. It would be bad enough if the opportunity cost was a steady one to two percent per year. But, it gets worse. Active management adds another layer of risk on top of market risk. There is a wide variation around the index return which at the tail can be devastating.

The distribution is actually far worse than it looks. The funds listed were the survivors and Morningstar doesn't include the several hundred funds that failed along the way. These failed funds normally get merged into other funds with better records making their performance magically disappear from the results. Survivor bias badly skews the illustration.

I grew up believing that managers added value, so it took a lot of evidence to change my view. But, literally hundreds of studies indicate it's not so. Not one credible shred of evidence supports active managers. I believe that the case has been proved beyond a shadow of a doubt, and even higher standard than necessary in a criminal case.

2 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,356.87 +288.00 1.69%
S&P 500 2,012.89 +40.15 2.04%
NASDAQ 4,644.3120 +96.4780 2.12%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs