Stock/Bond Indexes

The TAG 401(k) Plan has a lot of index funds in it. There are also a lot of actively managed funds, but the longer I trundle down the Great Highway of Life, the less enamored with pricey-managed funds I become. Here's why.

... Merrill Lynch research show[s] only 39% of fund managers beat the S&P500 last year.

This morning, the WSJ references Goldman Sachs research — it shows something similar. Their data showed 65% of U.S. large-cap stock funds trailed the benchmark index net of fees. (5 year average = 66%).

When they looked for funds that beat the index two consecutive years, they came up with an astounding number: A mere 10% of nearly 2000 U.S. stock funds beat their benchmark in both 2011 and 2012 (Source: Morningstar research).

This is why most people are better off putting money into inexpensive passive index funds. ...

TAG 401(k) trustees have been grappling with under-performing managed stock funds of late. For the past year, they've watched a mid-sized company value fund struggle to match its benchmark index ... and fail.

So two months ago, the trustees finally pulled the trigger and got rid of it. They didn't replace it with another managed fund because none of those were doing particularly well, either. In the end, the trustees mapped participants' investments in mid-cap stocks to the mid-cap index, which has been performing better than most of the more expensive managed mid-cap funds over longer blocks of time.

Index funds are the best way for most investors to go, and the reasons are simple: Few managers beat the market over five and ten-year spans. (It would be great if it were otherwise, but it's not.) A large part of the reason? When you're charging 1.34% for your expertise, but the index you're attempting to beat charges .34%, you've got to beat Mr. Market by 1% year in and year out or you're going to lose.

Most managers lose. The stats tell us so.