Stock Market

[lookout123]

Since our DLM (dear little muppet) doesn't seem interested in actually answering any of the questions he's been asked, or for that matter, providing any support for his opinions that he presents as facts, I'll briefly do it for him.

For the past several years to tweak my nose, DLM has repeatedly stated that mutual funds underperform the market. He points this out as his proof that money managers and advisors aren't worth their fees, and are generally thieves and liars. (DLM places a very high value on honesty.) I've asked him repeatedly asked DLM to cite his sources because I wanted to give him the opportunity to put the information into context. Something about intellectual honesty and all that jazz... He couldn't be bothered to respond, so in a nutshell here is the info.

It is common knowledge that "mutual funds underperform the market in a typical year." yep. That's a fact. That is such a commonly accepted fact that I won't even bother to cite a specific source. It is generally accepted that 75-80% of all funds underperform "the market". It is generally accepted that "the market" is represented by the S&P 500. That is the number that the talking heads get so agitated about on the nightly news. That is an index used to measure price movements of 500 companies. Now here is the thing, DLM's statistic of "most mutual funds underperform the market" is misleading because MOST mutual aren't even designed to beat the S&P 500 in any given year. What is even more telling is that they aren't even benchmarked against the S&P 500 because they have very little (if any correlation).

Example:

XYZ* bond fund has averaged 8.1% total return for the last ten years, net of all fees. The S&P 500 has averaged better than 11%. Our DLM would point at this fact as support for his position, ignoring the fact that XYZ fund is actually benchmarked against a different index - one made up of bonds. It isn't supposed to outperform the S%P 500, anequityindex. It is an investment used to provide income. It is an investment that should have a negative correlation with equities. It is an investment that a wise investor puts a portion of their assets in to provide income, stability, and diversity to their portfolio. It is the type of investment that is designed to be at optimal performance and earn its keep by going up when "the market" goes down. That is the point of asset allocation, balancing risk so as to provide a desireable rate of return in relation to an investor's personal goals and risk tolerance.

That is but one example of the "mutual funds that underperform the market". Roughly 25% of the mutual funds in existence are designed to benchmark against the S&P 500. Many of them do, in fact, underperform the market in any given year, but if our generally accepted figure is that 20-25% of funds "underperform the market" but only 25% of funds are designed to even correlate with that index... where is the problem?

I would be happy to discuss this further, but I have to go try to kick a ball into a net for awhile.

Next up: Stockbrokers routinely underperform the market by 1%. Care to beat me to the punch, DLM? You've only had a couple of years to prepare.

*Not the actual name of the fund, but for legal and ethical reasons I cannot discuss the actual name of the fund without knowing the specifics about every person who reads what I write. It is however a very real fund.