In our last blog, “Ignoring the Siren Song of Daily Market Pricing,” we examined how price- setting occurs in capital markets, and why investors should avoid reacting to breaking news. Now let’s look at why using a professional “pinch hitter” to try to beat the market is also ill-advised. In the words of Morningstar strategist Samuel Lee, managers who have persistently outperformed their benchmarks are “rarer than rare.”
As we explained in “Jelly Beans and Investing Wisdom,” independently thinking groups (such as capital markets) are better at arriving at accurate answers than even the smartest individuals in the group. Thus, even experts in analyzing business, economic, geopolitical or any other market-related information face the same challenges you do in predicting market behavior. For these experts, beating the collective group intelligence remains a prohibitively tall hurdle, especially when their fees are factored in.
But maybe you know of an extraordinary stockbroker, fund manager or TV personality who strikes you as being among the elite few who can make the leap. Maybe they have a stellar track record, impeccable credentials, a secret sauce or brand-name recognition. Should you turn to them for the latest market tips or should you pursue a strategy of capturing market returns with the least amount of risk, cost and tax?
Unfortunately, there is little credible evidence that hiring a stock picker/market timer is a good idea. In fact, the evidence to the contrary is overwhelming. Star fund managers often fail to survive, let alone persistently beat appropriate benchmarks. A 2013 Vanguard Group analysis found that only about half of some 1,500 actively managed funds available in 1998 still existed by the end of 2012, and only 18% of the survivors outperformed their benchmarks. Dimensional Fund Advisors found similar results in its independent analysis of 10-year mutual fund performance through year-end 2013.
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