Active Management Will Likely Get You Nowhere

Last Updated Jun 24, 2009 5:42 PM EDT

It seems like a never-ending battle. Active management continually tries to sell you on the hope of outperforming the market. And despite volumes of evidence that active management is a loser's game, some of you may still cling to that hope. There's a great Forbes article that will hopefully show you why you shouldn't rely on active management of your investments.

In the article Actively Mismanaged Funds, Scott Woolley focuses on the dismal performance of once legendary manager Bill Miller of the Legg Mason Value Trust.


Miller became the "poster boy" for believers in active management as his fund beat the market for 15 consecutive years. However, in 2006, 2007 and 2008, the fund underperformed the S&P 500 Index by 10.4, 12 and 18 percent, respectively. This performance has been so dismal that the fund's annual returns since its inception in 1983 barely beat the S&P 500, 11.1 percent versus 10.9 percent.

Woolley went on to note that if you "adjust for the fact that investors dumped most of their money into Miller's fund as his hot hand was cooling and the picture is uglier. If they had made identical bets on an S&P 500 Index fund over the past 26 years, their return would have averaged 5.8% versus Value Trust's 5.4%."

This is certainly not an isolated case. Consider the following examples from my book The Only Guide to a Winning Investment Strategy You'll Ever Need:
  • The Lindner Large-Cap Fund outperformed the S&P 500 each year from 1974 through 1984. Over the next 18 years, the fund returned 4.1 percent, underperforming its benchmark by over 8 percent a year.
  • David Baker was the manager of 44 Wall Street Fund. The fund was the top-performing diversified U.S. stock fund of the 1970s. Unfortunately, 44 Wall Street ranked as the single worst-performing fund of the 1980s, losing 73 percent. The fund did so poorly that in 1993 it was merged into the 44 Wall Street Equity Fund, which was then merged into the Matterhorn Growth Fund Inc. in 1996.
One of the amazing things about investing is that individuals continue to ignore not only all the academic research, but also the required SEC warning on all fund advertising that past performance is not a predictor of future results. It's the financial equivalent of ignoring the surgeon general's warning about smoking being dangerous to your health.
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    Larry Swedroe is a principal and director of research for the BAM Alliance. He has authored or co-authored 12 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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