Pursuing a Better Investment Experience – Decision 2: Trying to Outguess the Market

Many fund managers believe they can identify “mispriced” securities and convert that knowledge into higher returns. But the market’s pricing power makes it difficult for investors who try to outsmart other participants through stock picking or market timing.

Pursuing a Better Investment Experience - Unbranded (3)

In this chart, the gray box represents the number of US-domiciled equity funds in operation during the past 15 years. The striped area shows the proportion of funds that survived the 15-year period through the end of 2015. The survival rate was 43%. The blue-shaded area shows that only 17% of the equity funds survived and outperformed their respective benchmarks over the same time period.

The Main Takeaway: Over both short and long time horizons, the deck is stacked against mutual funds that attempt to outguess the market.

Beginning sample includes US equity mutual funds as of the beginning of the 15-year period ending December 31, 2015. Survivors are funds that were still in existence as of December 31, 2015. Non-survivors include funds that were either liquidated or merged. Outperformers are funds that survived and beat their respective benchmarks over the period. Past performance is no guarantee of future results.

Data Source: Analysis conducted by Dimensional Fund Advisors using data on US-domiciled mutual funds obtained from the CRSP Survivor-Bias-Free US Mutual Fund Database, provided by the Center for Research in Security Prices, University of Chicago. Sample excludes index funds. Benchmark data provided by MSCI, Russell, and S&P. MSCI data © MSCI 2016, all rights reserved. Russell data © Russell Investment Group 1995-2016, all rights reserved. The S&P data are provided by Standard & Poor’s Index Services Group. Benchmark indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Diversification neither assures a profit nor guarantees against a loss in a declining market.