Active managers fell behind, again, last year

The third year of the presidential cycle is supposed to be great for stocks, but 2011 didn't follow suit. / Courtesy of Flickr user dcJohn

One of my wishes every year is that investors would buck conventional wisdom and avoid mutual funds run by active managers -- stock pickers who try to beat market. Unfortunately, few investors seem ready to make the switch.

Disproving conventional wisdom in investing is a personal hobby of mine, such as the notion that the third year of the presidential cycle is great for stocks. Sure, there hasn't been a single negative return for the S&P 500 during a third year since the 1930s. Since 1945, the S&P 500 has historically advanced by an average of 15.9 percent per year in the third year of a president's term, 60 percent greater than its compound return since 1926. But last year debunked that "trend"; the S&P 500 returned just 2.1 percent, well below the historic average. Other U.S. equity asset classes produced much worse results.

2011 also gave us more evidence of the futility of active managers as a whole. According to a December Bank of America-Merrill Lynch report, only 23 percent of U.S. stock-fund managers were outperforming the S&P 500 Index for the year. Other indicators helped show the failure of active management as well. The Vanguard 500 Index Fund (VFINX) beat 81 percent of funds in its category. The question is simple: When the odds are stacked against you, why play the game?

You shouldn't base investment decisions on what's almost certainly nothing more than an exercise in data mining -- torture the data enough, and it will confess.

[mid-coast Mainer]

Larry -- Just copying my question from your 1/6 blog. I wish the # of comments showed next to the title of the blog, so one could track whether there were new comments without having to click on the blog......

Anyway: perhaps along the same lines as Ross' question about EM, but not sure. What are your thoughts about one's developed foreign asset allocation (both equities and bonds)? I guess I'm asking about UK, Europe, Japan. Doesn't it make sense to reduce one's exposure somewhat? Is there an allocation you'd suggest? Or perhaps a maximum exposure?

Thanks.

[LarryswedroeCBS]

Midcoast
First, I have been told they should have the comments fixed by end of the month

Second, re Europe, what do you know that the markets dont? The problems already reflected in prices. Also somewhat amusing is that I was hearing the same thing about the US in 08.

Have a plan, min and max and target allocations and stick with them

I hope that helps

Best
Larry