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Friday, January 19, 2018 8:47:09 AM
Why you should probably just give up trying to beat the stock market
By Mark Hulbert | January 19, 2018
Most top-performing mutual funds and hedge funds don’t repeat year after year
This past week saw the release of not one, but two, reports showing how incredibly difficult it is for stock investors to beat the market.
If we hadn’t already appreciated how dismal the odds are of beating the market, now’s your chance to finally do so.
The first bit of evidence is the S&P Persistence Scorecard, a report updated annually by S&P Dow Jones Indices. The report measures how many of the mutual funds that are above-average performers in one period are able to repeat their performance in subsequent years.
The findings are discouraging, to say the least. Take those U.S. equity mutual funds that were in the top 50% for one-year performance through September 2012. If being above-average were a matter of pure luck, you’d expect half of them to also be in the top 50% for the 12 months through September 2013. In fact, just 32.5% of them were.
The numbers continue to be discouraging with each subsequent year. On the assumption of pure randomness, just 6.25% of the original group of domestic equity mutual funds would have been an above-average performer in each of the next four 12-month periods (ending in September 2017). In fact, however, just 3.6% were.
In other words, the performance of domestic equity mutual fund industry is worse than a coin flip. (See chart, below.) S&P Dow Jones Indices has reached this same conclusion when studying other periods besides the past five years.
The second recent report was from Hedge Fund Research on the performance in calendar 2017 of the hedge fund industry. The average fund in their database gained 8.7%; the S&P 500 SPX, -0.16% , assuming the reinvestment of dividends, gained 21.8%.
To be sure, comparing hedge funds to the S&P 500 is not entirely fair. Hedge funds are supposed to hedge, of course, so it’s hardly a surprise that they didn’t do as well as the broad stock market in a year in which equities rose as much as they did. But even on a risk-adjusted basis, hedge funds have been largely disappointing. Over the last two decades, for example, a simple 60/40 stock-bond portfolio was just as conservative as the average hedge fund, yet made more money.
Even more compelling, however, is the 2017 performance of so-called funds of hedge funds. These funds employ a staff of experts to sift through the data on various hedge funds to find those few that are the best bets for future performance. If those funds of hedge funds don’t improve performance, then all of us should be especially humble about our abilities to beat the market.
The HFRI Fund of Hedge Funds Composite Index gained 7.7% in 2017. Note that this is even lower than what you’d expect had you picked a hedge fund at random.
To be sure, it’s not impossible to beat the market. Some mutual funds and hedge funds did jus that in 2017, as is true of any year.
But that’s not the issue. The issue is how likely the top performers from one year will remain top performers in the next, and the data on that question are uniformly depressing.
https://www.marketwatch.com/story/why-you-should-probably-just-give-up-trying-to-beat-the-stock-market-2018-01-19
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By Mark Hulbert | January 19, 2018
Most top-performing mutual funds and hedge funds don’t repeat year after year
This past week saw the release of not one, but two, reports showing how incredibly difficult it is for stock investors to beat the market.
If we hadn’t already appreciated how dismal the odds are of beating the market, now’s your chance to finally do so.
The first bit of evidence is the S&P Persistence Scorecard, a report updated annually by S&P Dow Jones Indices. The report measures how many of the mutual funds that are above-average performers in one period are able to repeat their performance in subsequent years.
The findings are discouraging, to say the least. Take those U.S. equity mutual funds that were in the top 50% for one-year performance through September 2012. If being above-average were a matter of pure luck, you’d expect half of them to also be in the top 50% for the 12 months through September 2013. In fact, just 32.5% of them were.
The numbers continue to be discouraging with each subsequent year. On the assumption of pure randomness, just 6.25% of the original group of domestic equity mutual funds would have been an above-average performer in each of the next four 12-month periods (ending in September 2017). In fact, however, just 3.6% were.
In other words, the performance of domestic equity mutual fund industry is worse than a coin flip. (See chart, below.) S&P Dow Jones Indices has reached this same conclusion when studying other periods besides the past five years.
The second recent report was from Hedge Fund Research on the performance in calendar 2017 of the hedge fund industry. The average fund in their database gained 8.7%; the S&P 500 SPX, -0.16% , assuming the reinvestment of dividends, gained 21.8%.
To be sure, comparing hedge funds to the S&P 500 is not entirely fair. Hedge funds are supposed to hedge, of course, so it’s hardly a surprise that they didn’t do as well as the broad stock market in a year in which equities rose as much as they did. But even on a risk-adjusted basis, hedge funds have been largely disappointing. Over the last two decades, for example, a simple 60/40 stock-bond portfolio was just as conservative as the average hedge fund, yet made more money.
Even more compelling, however, is the 2017 performance of so-called funds of hedge funds. These funds employ a staff of experts to sift through the data on various hedge funds to find those few that are the best bets for future performance. If those funds of hedge funds don’t improve performance, then all of us should be especially humble about our abilities to beat the market.
The HFRI Fund of Hedge Funds Composite Index gained 7.7% in 2017. Note that this is even lower than what you’d expect had you picked a hedge fund at random.
To be sure, it’s not impossible to beat the market. Some mutual funds and hedge funds did jus that in 2017, as is true of any year.
But that’s not the issue. The issue is how likely the top performers from one year will remain top performers in the next, and the data on that question are uniformly depressing.
https://www.marketwatch.com/story/why-you-should-probably-just-give-up-trying-to-beat-the-stock-market-2018-01-19
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Click on "In reply to", for Authors past commentaries
Information posted to this board is not meant to suggest any specific action, but to point out the technical signs that can help our readers make their own specific decisions. Your Due Dilegence is a must!
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