In a recent two-part series of posts, “Investment Hindsight is 20/20,” we covered Dimensional Fund Advisors research that explored the hard evidence on how squishy past performance has been as a predictor of future success for individual mutual funds. Dimensional demonstrated how that strategy was out, with three strikes:
- Each fund most operate within a largely efficient market where past performance is quickly priced into future expectations.
- Funds’ odds for survival are low in a highly competitive environment.
- The costs involved in achieving outperformance are often insurmountable.
Shortly after we posted this series, Vanguard Funds published another report, “The Bumpy Road to Outperformance,” offering additional, similar evidence. Vanguard analyzed the performance of all actively managed U.S. stock funds available to investors in 1998 – 1,540 funds total – following their track record for the next 15 years through year-end 2012. They concluded:
- Survivorship – Nearly half of the funds (700 of them) didn’t even survive the 15-year period.
- Performance – Of the survivors, only about 18 percent of them out-performed their appropriate benchmark.
- Reliability – Among those 18 percent who managed to survive and outperform their benchmarks from 1998–2012, most of them experienced at least three years in a row of underperformance along the way. The bumpy ride significantly tested investors’ resolve to stay the course if they wanted to actually achieve long-term growth.
Vanguard reported, “Only 6% of the initial 1,540 funds survived, outperformed, and avoided three consecutive years of underperformance.”
SAGE Serendipity: As enigmatic as our stock markets can be, some things are even more perplexing. Did you ever wonder why “pound” is abbreviated as “lb.”? Here’s the answer. (Hint: If you’re fluent in Latin, it all makes sense.)