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EVEN INDEX FUND investors need the occasional psychological boost—which brings us to the ongoing S&P Index Versus Active (SPIVA) study’s mid-year review, which was published last week. The data from S&P Dow Jones Indices, a division of S&P Global, serve as a reminder that picking winning stocks and funds is mighty hard.
I used to serve on a 401(k) committee. I’d keep an eye on the active funds included in our investment lineup. Returns looked good. The thing is, 401(k) plans tend to pluck the strongest recent performers to include in their lineup. Inevitably, some employees park retirement money in those hot funds, only to see future returns fail to live up to past glory. That’s why I advocated for fewer active funds and championed adding a series of target-date funds, which most plans now offer.
While retirement plans sometimes offer options that aren’t investor-friendly or cost too much, individuals still control where to invest their money. The SPIVA report shows low-cost index funds are the smart choice—assuming they’re one of the options. According to S&P’s mid-year review, in 15 out of 18 U.S. stock fund categories, the majority of actively managed funds underperformed their benchmark over the 12 months through June 30.
Arguably, that’s short-term noise. Long-run underperformance trends are more revealing—and jaw-dropping when you see them for the first time. The report finds that 88% of U.S. stock mutual funds underperformed their benchmark over the past 20 years. It’s no better for international managers. The percentage of foreign stock funds underperforming S&P’s International 700 index stands at 91%. As for bond funds, it’s the same story. I’ll spare you the data.
Active fund managers talk a convincing game on TV and podcasts. But don’t be fooled by their narratives and “best ideas” lists. The evidence tells the true story—that sticking with low-cost index funds is our best bet for long-term success.
Market returns, best obtained via total market index funds (directly or via target date funds), while saving 10-15% of your income over 30 years, have in the past generated a substantial nest egg that is generally sufficient for a modest retirement or better. It’s simple, but not easy.
It seems to be getting harder in today’s business environment, where employment seems less likely to be long-term. This heightens the drag from employers who require several years of employment for matching funds to vest. I have to admit that what once seemed like a pretty good strategy may require a more aggressive approach. I suspect this is a substantial impetus to FIRE.
I’m curious what you think about the changes you’ve seen, and how you see that impacting savings rates, portfolio AA’s, types of investments, and years of work, etc?
For sure. Unfortunately, people end up having a bunch of smallish accounts every which way. It takes effort and intent to stay consolidated–and that’s important to ensure a portfolio is where it should be from a risk/return point of view. Savings rates will be a lot lumpier/inconsistent and perhaps a larger emergency reserve is needed (but that doesn’t mean a pile of cash for most people).
This message can’t be repeated often enough, it’s exceedingly unlikely to “beat the market” over an extended period, which goes hand in hand with the concept of starting early and investing for the long term. I’m far from perfect, but by far the bulk of my investment gains over the years have come from otherwise “passive” indexed investments.
Making it tough for diversified investors is seeing a very simple S&P 500 investor reaping huge gains. Foreign stocks, value equities, small caps–all have not delivered returns commensurate with US mega-cap tech/growth stocks.