Financial Planning Fundas 101

By pjain      Published May 3, 2020, 3:01 a.m. in blog Invest   

Financial Planning Fundas 101

Active or Passive - No MF beats market - Survivorship

  • Is outperformance coming from deep skill or is it mostly luck (Random).
  • In reality a monkey throwing darts at a stock listings newspaper does better than 90% of MF managers!
  • As told by "A Random Walk down Wall Street by Burton G. Malkiel"

  • Very few MF beats market

  • p(OutperformMkt) = 8% (18+9+2)/358 =8.1%

  • Survivorship

  • Only 78/358 or 22% survived in 50 years

  • PROBLEM - HOW TO PICK the or 6 our of 358 (<2% = 22%*8%) that survive AND outperform SPY500

  1. In all markets (2/3rds of time rising) over 15 years only 10% of MFs beat their respecitive Index. In other words: - Buy and hold and forget (net of fees) 9/10 times beats any active tilt!

- SRC: S&amp;P Indices vs Active Funds (SPIVA) scorecard
  1. But aren't active MFs better in bear markets in agilely getting out in time, minimizing drawdown? In recent two recessions, this is not borne out - MF in Bear markets Large cap 55pct, and 70-80pct of all mid/scap MFs are beaten by their benchmarks ie passive index ETFs.

  • Europe was very similar to USA.

  • Hindsight Mirrors - Outperformance in past is no guide to future persistence!

  • It is VERY Hard to pick persistent Outperformance - In just 5 years nearly equally likely to be in any one of 4 quartiles, and 8% will disappear.

Do Stock Pickers Succeed?

Which Styles do better? - Small Cap vs Large Cap, Value vs Growth

Does market timing work?

What Asset Allocations should I have?


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