In a recent report, S&P Dow Jones Indices compared the performances of actively managed US equity funds focusing on small caps, mid-caps and large caps and their respective benchmark indices and found out that in all three groups, over 90 percent of funds underperformed over a 15-year period.
The research finding is likely to prompt more investors to switch into index funds, moving away from funds involved in selective stock picking.
There are a number of reasons why it’s getting harder for stockpickers to beat the market.
First of all, a study shows that the performance of benchmark indices is getting more reliant on a very small number of top performing companies. If a manager misses those, it’s very likely his fund’s performances will fall behind.
Identifying the winners is difficult enough, not to mention picking the winners repeatedly year after year.
Meanwhile, in addition to picking the right stock, one needs to stay invested over a long period to fully realize the counter’s potential.
That means resisting the temptation time after time to take profit. Now, this is also one aspect where many people would fail.
The full article appeared in the Hong Kong Economic Journal in Chinese on April 18
Translation by Raymond Tsoi
[Chinese version 中文版]
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