Why portfolio managers struggle to beat the market
Outperforming the stock market in the United States is difficult. Using the S&P 500, the benchmark index of U.S. equities, as the standard of performance, only 27% of actively managed large-capitalization equity funds beat the passive benchmark over the 12-month period ending June 30. Over the decade ending in June, just 13% of actively managed stock funds beat the broad S&P 500 index.
TL;DR
- Only 27% of actively managed large-cap equity funds beat the S&P 500 in the year ending June 30; only 13% beat it over the decade.
- High management fees (0.5%-1%) for active funds compared to index funds (0.02%-0.05%) create an immediate hurdle.
- The disproportionate returns of a few tech stocks (e.g., Nvidia, Alphabet) make it hard for active managers to match the index if underweight.
- Diversification rules and the desire to avoid job loss incentivize active managers to avoid concentrated risks, leading them to stray from consensus bets.
- Holding cash for redemptions and missing the market's strongest days can significantly hurt active fund performance.
- The stock market is efficient, making it difficult to find new information not already priced in.
- Human emotion and the difficulty of betting against the consensus often lead professional managers to underperform.
- For most individual investors, low-cost S&P 500 index funds are the best way to build long-term wealth.