The investment landscape is a tricky terrain with mirages that often lead to disappointment. Imagine you are an investor, and the oasis you seek is superior performance. Now, would you rather traverse this terrain yourself, picking your stocks, or hire a guide, an active fund manager? The answer might not be as straightforward as it seems.
According to extensive research, a staggering 94% of active fund managers do not beat the market. It's an inconvenient truth that even financial titans like Warren Buffett's Berkshire have now underperformed the S&P 500 over a 20-year period. But why is this so?
The Stock Picking Dilemma
Contrary to popular belief, the odds of picking a winning stock are far from a 50/50 gamble. Shockingly, 80% of all stocks have historically generated a 0% return. Yes, the remaining 20% of stocks are responsible for all the gains. If you pick a stock at random, your chance of making a profit drops to a lowly 20%.
Furthermore, the grim reality extends to large-cap stocks as well. A meager 26% of the stocks in the S&P 500 outperform the index returns, with only 5% generating multi-bagger returns. So, in essence, even if you have a nose for potential winners, the odds are stacked heavily against you.
Remember!! Every time you fail picking an investment in a project and you fill like sh*t: this is part of the game. Michael Jordan won 6 NBA rings. But he played 15 leagues. That means he lost 9. He only won 6/15!!
The Dominance of Tech and the Irony of Performance
The tech industry has indisputably dominated the last two decades. Still, a glance at the top ten performers in the S&P 500 from 2000 to 2020 reveals an intriguing fact. Only two of these frontrunners hailed from the tech industry.
Of course, we should consider Bitcoin and ETH in this study, but their perfomrance is out of this rank ;-)
Consider UnitedHealth, the second best-performing stock from 2000 to 2020 with a staggering ~5,000% return. Even with such solid fundamentals and impressive growth, it experienced annual drawdowns between -5% and -36%. Imagine holding such a volatile stock through these drawdowns, questioning your investment while the market soars.
Despite this amount of Drawdowns, take a look at this performance:
Does it sund familiar to you? Take a look into the downdraws of Bitcoin in this graph:
Similar scenarios unfolded with giants like Meta. Despite impressive financial metrics, the stock plummeted by 55% in 2022, only to rocket by 200% later. Such volatility tests the patience of fund managers, who often buckle under the pressure.
will continue...
Yours in Crypto and AI
FAQs
Less than 10% of active large-cap fund managers have outperformed the S&P 500 over the last 15 years. The biggest drag on investment returns is unavoidable, but you can minimize it if you're smart. Here's what to look for when choosing a simple investment that can beat the Wall Street pros.
Why is it so hard to beat the market? ›
High volatility: Stocks are inherently volatile assets, subject to fluctuation in market sentiment, economic conditions, and company-specific factors. This portfolio would be likely to experience significant price swings, which can lead to substantial losses during market downturns.
Can you really beat the market over the long haul? ›
It is relatively common to beat the market for 1–3 years at a time. That can largely be explained by luck. But the data clearly shows that even professional fund managers are unable to beat the market consistently over a longer period of time, like 10–15 years.
Do most actively managed funds outperform the market? ›
In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons. Just one out of every four active funds topped the average of passive rivals over the 10-year period ended June 2023. But success rates vary across categories.
Why can't fund managers beat the market? ›
The challenge is that as investors recognize a manager's skill, they place more assets under his management. Those additional assets make it harder for the manager to achieve the same level of performance—among other reasons, because the bigger a fund is, the more likely it is to move prices.
Why don't fund managers beat the market? ›
There is at least a half-dozen reasons why this is the case. The massive size of funds that are actively managed by the industry's behemoths – Vanguard, Fidelity, Schwab, Blackrock and so on – means they cannot beat the market because they are the market.
How many managers beat the S&P 500? ›
Unsurprisingly, the majority do not beat those benchmarks, and even the ones who do don't keep their lead for long. Over its 23-year history, the SPIVA report shows that, on average, 64% of active large-cap fund managers fare worse than their benchmark (the S&P 500) in any given year.
Do most investors beat the S&P 500? ›
The average investor may not have a very good chance of beating the market. Regular investors may be able to achieve better risk-adjusted returns by focusing on losing less. Consider using low-cost platforms, creating a portfolio with a purpose, and beware of headline risk.
What percentage of traders beat the S&P 500? ›
From 2010 through 2021, anywhere from 55 percent to 87 percent of actively managed funds that invest in S&P 500 stocks couldn't beat that benchmark in any given year. Compared with that, the results for 2022 were cause for celebration: About 51 percent of large-cap stock funds failed to beat the S&P 500.
Who has beaten the market consistently? ›
The Legendary Investors
Warren Buffett, for example, has produced a 20.9 percent annualized return over fifty-three years. Peter Lynch of Fidelity returned 29 percent over thirteen years. And Yale's David Swensen has returned 13.5 percent over thirty-three years.
International developed stock fund managers were able to beat their respective indexes in four of the past 23 years, or 17.4% of the time. Meanwhile, emerging markets active fund managers fared even worse. They only managed to outperform in two years, or 8.7% of the time, during these 20-plus years.
Which funds have consistently beaten the S&P 500? ›
10 funds that beat the S&P 500 by over 20% in 2023
| Fund | 2023 performance (%) | 5yr performance (%) |
|---|
| Sands Capital US Select Growth Fund | 51.3 | 76.97 |
| Natixis Loomis Sayles US Growth Equity | 49.56 | 111.67 |
| T. Rowe Price US Blue Chip Equity | 49.54 | 81.57 |
| MS INVF US Growth | 49.29 | 62.08 |
6 more rowsJan 4, 2024
The SPIVA scorecard found that just 40% of large-cap fund managers outperformed the S&P 500 in 2023 once you factor in fees. So if the odds of outperforming fall to 40-60 for a single year, you can see how the odds of beating the index consistently over the long run could go way down.
Why do active managers underperform? ›
Another driver of the underperformance of active funds, according to McDermott, is fees: “All funds have years where they underperform, however, the longer-term evidence is undeniable that active managers have continued to struggle. The main reason for this underperformance is because active funds charge higher fees.”
How many active funds outperform the market? ›
However, when considering a 10-year scope, only 44% of active funds kept above the index and the active average return for 10 years only hit 56.5% while passive reached 60.5%. “While all active fund investors expect outperformance, it's not statistically possible for all managers to outperform,” Khalaf said.
How often do actively managed funds beat the market? ›
Although it is very difficult, the market can be beaten. Every year, some managers boast better numbers than the market indices. A small fraction even manages to do so over a longer period. Over the horizon of the last 20 years, less than 10% of U.S. actively managed funds have beaten the market.
