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I have been wondering about these claims that it is better to invest in an index fund than in an actively manged one. Certainly, the statistics show that on ave

by marvin 19y ago

I have been wondering about these claims that it is better to invest in an index fund than in an actively manged one. Certainly, the statistics show that on average, actively managed funds come out behind index funds. But the best actively manged funds have been able to beat their indexes for at least ten years, even in periods with negative growth. Anyone else have any thoughts about this? It could, of course, just be that the best funds happen to get lucky every year for a decade. But that seems a bit simple to me, are there really statistical anomalies that are that big? It seems to me that if you are going to pick an actively manged fund, you better pick one which has a proven track record. Aren't most of these funds managed by businesses not preaching too loudly about their past performance?

eric5179 19y ago
You need to keep in mind that past performance does not always equal future performance. This isn't just true of the stock market, but also in every aspect of life. I do agree that if you pick an actively managed fund picking one with good past performance is safer than one with poor past performance. My money will still be heading into index funds.
- marvin 19y ago
  I've always figured that the "past performance, future performance" phrase principally was just legalese, not investment advice. I'd like to see a study on this. On the other hand, it would be very interesting to see the "past performance" of these J.P. Morgan whiz kids claiming that they always come out ahead of their reference indexes. Past performance corrected for buyouts of successful funds.
  - icky 19y ago
    > I've always figured that the "past performance, future performance" phrase principally was just legalese, not investment advice. I'd like to see a study on this. You do realize that any such study would necessarily be based entirely on past performance, and would not necessarily predict future performance. ;-) See also: http://en.wikipedia.org/wiki/David_Hume#Problem_of_induction http://en.wikipedia.org/wiki/David_Hume#Problem_of_induction
    - marvin 19y ago
      It doesn't have to be entirely based on past performance - you could do some statistical analysis on the number of funds, which funds are associated with individual investors, fund returns and find whether the distribution of returns overlaps with the distribution that says "the best funds were just lucky". What I am interested in knowing is whether the best investors are able to beat the market over time. And there is a lot of anecdotal evidence that suggests this, for example (a rather extreme one, though) the best hedge funds which have generated an annualized 30% return over more than 15 years. With especially high returns when the rest of the world is tanking. Although this is an edge case, this kind of track record doesn't exactly scream "lucky".
      - icky 19y ago
        > It doesn't have to be entirely based on past performance - you could do some statistical analysis on the number of funds, which funds are associated with individual investors, fund returns and find whether the distribution of returns overlaps with the distribution that says "the best funds were just lucky". Right, and as fast as you can generate that data, it immediately falls into the category of "past performance". It's not a market problem, it's a philosophy-of-empiricism problem. ;-) > What I am interested in knowing is whether the best investors are able to beat the market over time. And there is a lot of anecdotal evidence that suggests this, for example (a rather extreme one, though) the best hedge funds which have generated an annualized 30% return over more than 15 years. With especially high returns when the rest of the world is tanking. Although this is an edge case, this kind of track record doesn't exactly scream "lucky". Now, that part is a market problem, and for that, "past performance" really does come into play: are today's best investors universally superior market animals, or are they just uniquely adapted to the current climate?
Tichy 19y ago
The theory is that the funds with the proven track record were just lucky.
yters 19y ago
It's probably best to go with index funds until most are going with index funds.

by marvin 19y ago

eric5179 19y ago

You need to keep in mind that past performance does not always equal future performance. This isn't just true of the stock market, but also in every aspect of life. I do agree that if you pick an actively managed fund picking one with good past performance is safer than one with poor past performance. My money will still be heading into index funds.

marvin 19y ago
I've always figured that the "past performance, future performance" phrase principally was just legalese, not investment advice. I'd like to see a study on this. On the other hand, it would be very interesting to see the "past performance" of these J.P. Morgan whiz kids claiming that they always come out ahead of their reference indexes. Past performance corrected for buyouts of successful funds.
- icky 19y ago
  > I've always figured that the "past performance, future performance" phrase principally was just legalese, not investment advice. I'd like to see a study on this. You do realize that any such study would necessarily be based entirely on past performance, and would not necessarily predict future performance. ;-) See also: http://en.wikipedia.org/wiki/David_Hume#Problem_of_induction http://en.wikipedia.org/wiki/David_Hume#Problem_of_induction
  - marvin 19y ago
    It doesn't have to be entirely based on past performance - you could do some statistical analysis on the number of funds, which funds are associated with individual investors, fund returns and find whether the distribution of returns overlaps with the distribution that says "the best funds were just lucky". What I am interested in knowing is whether the best investors are able to beat the market over time. And there is a lot of anecdotal evidence that suggests this, for example (a rather extreme one, though) the best hedge funds which have generated an annualized 30% return over more than 15 years. With especially high returns when the rest of the world is tanking. Although this is an edge case, this kind of track record doesn't exactly scream "lucky".
    - icky 19y ago
      > It doesn't have to be entirely based on past performance - you could do some statistical analysis on the number of funds, which funds are associated with individual investors, fund returns and find whether the distribution of returns overlaps with the distribution that says "the best funds were just lucky". Right, and as fast as you can generate that data, it immediately falls into the category of "past performance". It's not a market problem, it's a philosophy-of-empiricism problem. ;-) > What I am interested in knowing is whether the best investors are able to beat the market over time. And there is a lot of anecdotal evidence that suggests this, for example (a rather extreme one, though) the best hedge funds which have generated an annualized 30% return over more than 15 years. With especially high returns when the rest of the world is tanking. Although this is an edge case, this kind of track record doesn't exactly scream "lucky". Now, that part is a market problem, and for that, "past performance" really does come into play: are today's best investors universally superior market animals, or are they just uniquely adapted to the current climate?

Tichy 19y ago

The theory is that the funds with the proven track record were just lucky.

yters 19y ago

It's probably best to go with index funds until most are going with index funds.