Monday, April 13, 2009

Why active managers underperform..

A nice post on Portfolio.com on why active managers underperform. Click through to the underlying article also.

The basic idea: Only about 1/5 of stocks are actually significant winners. Most don't do too much. A completely passive approach to picking stocks uses an equal weighted method and will put at least some money in the unknown "winners". But most active managers don't equally weight, and weight more heavily in their "expected" winners. As they (the active managers) don't actually have any stock picking skill, there is a good chance that there overweighting is in stocks that will underperform (i.e. they overweight in the 4/5 that don't do too much).

This relates to my recent post on the re-jiggering of the Dow and S&P 500. More I think about it, it seems that rather than index funds, folks should invest in randomly generated "buy and hold" funds. Which of course, are not available in most retirement plans.