I just read an interesting little article called Yesterday’sTop Mutual Funds in Today’s 401k Lineup.
I like the theme and one key point in particular caught my
attention: “Actually, no actively
managed fund stays on top forever”.
In fact, virtually no actively managed funds outperform their index with any regularity whatsoever! Decades of data and numerous empirical studies show that index funds, at approximately 1/5 the cost, outperform actively managed funds about 80% of the time. Not only that. Recent studies show that, more often than not, when active advisors recommend changes in funds, plan costs increase and the new fund does worse than the one it replaced! How could that be? Think about it. No one replaces a fund that’s doing well (so you are “selling low”) — and no one adds a fund that’s doing poorly (so you’re “buying high”). Is that not exactly the opposite of what conventional wisdom says you’re supposed to do? Is that not the very definition of “chasing returns”?
In fact, virtually no actively managed funds outperform their index with any regularity whatsoever! Decades of data and numerous empirical studies show that index funds, at approximately 1/5 the cost, outperform actively managed funds about 80% of the time. Not only that. Recent studies show that, more often than not, when active advisors recommend changes in funds, plan costs increase and the new fund does worse than the one it replaced! How could that be? Think about it. No one replaces a fund that’s doing well (so you are “selling low”) — and no one adds a fund that’s doing poorly (so you’re “buying high”). Is that not exactly the opposite of what conventional wisdom says you’re supposed to do? Is that not the very definition of “chasing returns”?
So your problem may not be that you don’t have an advisor. More likely, your problem is that you have an
advisor who told you to have actively managed funds in your plan and that he
now performs the admirable service of making periodic changes to find you
better ones. The data says that strategy fails with amazing frequency.
Everybody thinks their advisor is the exception to the data-proven rule, or you
wouldn’t have him around. But think about this: The fund your genius is telling
you to buy….someone else’s genius is telling them to sell.
Want to see how your actively managed funds are doing
against just the S&P index for example? Go to Yahoo Finance. You can readily check out your actively
managed funds, for any period of time, against an index. If you take the time
to do it, one of two things should happen: You dump your advisor and your
actively managed funds and join the 401k Revolt; or,
you insist that your advisor start taking you to places like the
Bahamas. Which one do you think is the best course for a plan fiduciary?
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