Investing: Hard times for stock pickers
“Beating the market has always been hard for the pros. Lately it has been even harder,” said Justin Lahart in The Wall Street Journal. Over the decade that ended in 2015, an average of just 37 percent of large-cap, actively managed mutual funds outperformed the Russell 1000 index of the U.S.’s largest companies in any given year. And in the first seven months of 2016, only 14 percent outpaced the benchmark. Unsettled global markets and weak corporate earnings have made it more difficult for fund managers to pick winners, but so has the steady exodus of investors into index funds with lower fees and more consistent performance. For stock pickers at mutual funds, that means “fewer patsies at the poker table to take chips away from.”
“The lion’s share of retirement dollars is going into passive funds these days—and investors are better off for it,” said Mark Miller in Reuters.com. Even the best-performing actively managed funds seldom succeed in staying on top for long. Only 7.33 percent of U.S. equity funds that were in the top quartile of highperforming mutual funds in March 2014 were still there two years later. And a measly 3.7 percent of large-cap funds stayed in the top half of performers over five consecutive years. In theory, an astute investor could hop in and out of hot funds at just the right moment, but most people don’t have the time or the energy for that kind of tinkering. For the average investor, passive investments are the way to go.
But blindly pumping your money into an index fund won’t “guarantee investing success,” said Walter Updegrave in Time.com. While many offer rockbottom annual fees of 0.1 percent or less, some indexes charge 10 times that amount or more, putting them on par with many actively managed funds. A growing number of investment firms have also started offering increasingly niche indexes that track “everything from wind power and cybersecurity to obesity and organic foods.” Remember, the idea behind index investing is to put together a broadly diversified portfolio that will match the market’s return, not to gamble on an industry that’s hot right now.
The experts could be due for a comeback, said Stan Choe in the Associated Press. In recent years, stocks have largely moved up and down in unison, blunting the advantage of picking the best company in an industry. That’s at least partly due to the Federal Reserve, which has kept stocks high through a massive stimulus in the form of low interest rates. The Fed’s next move, though, will likely be to raise rates, not lower them. When that happens, it could be time to make “the most contrarian move in investing today: Trust a stock picker.”