It seems that many of our readers doubt the wisdom of active management.
Last week, I responded to a reader's question about the Efficient Market Theory. The contemporary version of this academic theory recognizes that in investing, you can't expect to earn superior returns without superior effort. But the theory won't tell you that index investing is the only way to invest.
I stated in the column that "it isn't futile to invest in actively managed funds. But if you do, your selection process would certainly require time, effort, creativity, skill and luck. Frankly, if you spend more time on your research, you may have a better chance of finding an actively managed fund that can beat the market."
Some readers didn't buy my comments.
"I'll have to disagree with you that with creativity and research you can find a fund manager who can consistently beat the market," writes
. "Heck, if a few thousand people each flip a coin 10 times, some of them will flip heads all 10 times. It doesn't mean they're more proficient coin-flippers than the rest of us."
seconds that thought. "I'm not convinced. ... So few actively managed funds beat the market, the odds are already against the fund picker. Once the higher costs and lower tax efficiencies of actively managed funds are taken into consideration, far fewer actively managed funds beat the
than are indicated by the 'absolute' returns," he writes.
"Of course, there will always be a small percentage of funds that beat the market now and then. They might even outperform over a number of years, but it's virtually impossible for them to keep it up year after year. And as surely as beating the market is difficult (on average, year after year), imagine the poor guy who has to guess which fund to jump to next!" Papamarkos concludes.
, a student of finance at
Wright State University
, weighs in: "I'm dismayed that you did not offer more practical advice in your response to the gentleman's question on the EMT. In theory, the average investor must earn returns equal to the exact average return of the market. In practice, trading fees, management costs and the higher taxes due to the increased trading of active management cause the average investor's return to fall BELOW the market average return."
says I missed the point. "Your article was interesting, but I think that you are gliding over some of the issues here," he writes. "The real question boils down to: Are U.S. markets inefficient enough such that a mutual fund buyer can select a fund based on past performance and be assured of market-outperforming returns, after expenses? In other words, after paying for all the expenses (brainpower, research, etc.) of the fund, is the investor investing with a market-outperforming manager or is he just lured into investing with a manager who, on average, underperforms and has merely had a good statistical run over some period?"
reveals a differing opinion. "While the large-cap indices have dominated the last four years, one must remember that the investment climate is as extreme in its success as 1973-74 was in the other direction. The percentage of managed funds that beat the index has fallen a lot recently but may increase somewhat with different market conditions."
All are valid points and are certainly more fodder for the debate.
I Am Dagen, Hear Me Roar
A large chunk of the reader email I get is addressed to Mr. McDowell. I know Dagen is an ambiguous name, and I don't get my photo plastered on the site every day. But just to clear things up, I am female.
TSC Fund Forum aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.