Sunday, April 2, 2017

Picking Stocks is Hard, Picking Mutual Funds is Harder

Princeton Economist Burton Malkiel, author of "A Random Walk Down Wall Street" famously pointed out, 
“If picking stocks is a random walk down Wall Street, picking mutual funds is an obstacle course through Hell’s Kitchen."
The editors of Kiplinger's personal finance magazine have validated that statement.  Kiplinger's regularly publish "The Kiplinger 25" - a list of Kiplinger's favorite mutual funds.  I dug up a 10-year-old Kiplinger's magazine from January 2007 and analyzed the 10-year-old Kiplinger 25 with the help of Morningstar. Here's what I discovered:
  • Only one mutual fund from the January 2007 Kiplinger 25 still makes the Kiplinger 25 just 10 years later.  I won't even tempt you with the name of that one surviving fund since it has under-performed it's style benchmark index by more than 1% per year the past 10 years.  
  • 17 of the Kiplinger 25 funds have failed to beat their style benchmark index the past 10 years. 
  • The average Kiplinger 25 mutual fund under-performed its style benchmark index by an average of 1.25% per year the past 10 years. 
  • The average US stock fund in the Kiplinger 25 under-performed its style benchmark by an average of 2.10% per year the past 10 years. 
  • Had you invested $10,000 in each of the January 2007 Kiplinger 25 mutual funds (an investment of $250,000), you would now have $410,342.  However, you might have had $53,734 MORE or $464,076 had you invested in 25 competing index funds instead.
The managers of the 25 mutual funds in question can testify that picking stocks is hard.  
The editors of Kiplinger personal finance magazine have proven picking mutual funds is even harder. 
So, why not just buy low-cost index funds?

No comments:

Post a Comment