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.