I’m already convinced that index funds are the best choice for a person’s core investments, but the studies into index fund performance versus actively managed funds keeps coming out, and the news is always getting worse for the active funds. Here’s a couple highlighting the sad state of the “expertly” actively managed funds, those investments driven by the profit motive of beating the market – a game full of fools.

Rational Investing in Irrational Times

“The year 1998 was certainly the one in which active managers had plenty of opportunity to add value, either by moving to cash or by choosing winners…Let’s look at the facts. The 164 actively managed emerging market funds tracked by Morningstar fell 26.9% in 1998, far more than the 18.2% loss by the Vanguard Emerging Markets Stock Index Fund…an underperformance of nine percent, not including the further expenses of taxes on fund distributions.”

No major winners in either pack with both options losing big, but you have to assume you’ll lose at some point when dealing with the stock market. That’s why the real winners have long-term outlooks in terms of years not months, weeks, or day, buy and hold – forever if possible, as Warren Buffet says. It’s just as important that you limit your losses when times are bad as it is bringing in the profit when the times are good. The lower your volatility, the better your results.

Improved Study Finds Index Management Usually Outperforms Active Management

“Through examination of current and survivor-bias-minimized fund data, as well as other academic studies on this issue, we find that index management outperformed active management in most asset classes.

Surprisingly, index management outperformed active management in the Small-Cap Value and Small-Cap Growth asset classes—precisely the asset classes where one would expect active management to outperform.”

Index funds aren’t perfect, but they’re undoubtedly a better investment than active funds. Index funds help simplify the equation while providing on average better overall returns and lower overall losses without the guess work of picking this year’s winning active fund over this year’s vast selection of actively managed losers.

I’ll end this post with the words from a wise man, John Bogle’s speech given at the Risk Management Association:

“Think about it. When investors—individual and institutional alike—engage in far more trading— inevitably with one another—than is necessary for market efficiency and ample liquidity, they become, collectively, their own worst enemies. While the owners of business enjoy the dividend yields and earnings growth that our capitalistic system creates, those who play in the financial markets capture those investment gains only after the costs of financial intermediation are deducted. Thus, while investing in American business is a winner’s game, beating the stock market—for all of us as a group—is a zero-sum game before those costs are deducted. After intermediation costs are deducted, beating the market becomes, by definition, a loser’s game. (page 11, Black Monday and Black Swans [pdf]) I recommend reading the whole thing, great speech.

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