Confirmation by the Numbers

I love data. Especially data from reliable sources (not everything you read on the Internet is true!). I love data even more when the data confirms and supports our investment strategy. So even though as recently as the May “Fun Facts,” we wrote about the lack of consistency and persistency in mutual fund performance, the Standard & Poor’s Corporation recently published new research on the same subject. Before jumping in to the “Fun Facts” numbers, you may be asking yourself, “Why is this important and what does it mean to me?” It is important evidence in the ongoing debate of active vs. passive management (stock pickers vs. index or asset class investors) and therefore answers the question “What is the best way to invest my money?” We hope you agree that is an important question.

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Now for some numbers as of March 31, 2015:

Of U.S. stock funds as of March 31, 2011, that were in the top 25% of best performers ...

… only 31% were still in the top 25% after one year

… only 5% were still in the top 25% after two years

… only 1% were still in the top 25% after three years

… only 0.28% were still in the top 25% after four years

Moral of the story: Don’t chase last year’s best performers. Consistency is important. We look for funds in the top half of relative benchmark comparisons and strive to avoid funds in the bottom 25%, although consistent funds may dip in the bottom periodically. This is why we use market index funds from The Vanguard Group and asset class funds from DFA (Dimensional Fund Advisors). They will have good consistency, and their low fees contribute to strong relative performance over time.

For you real trivia buffs, the Dow Jones Industrial Average finished the first six months of 2015 down 1.14%, breaking a four-year streak of positive first-half gains. Don’t take it as too much of a predictor, though. In 118 years of Dow Jones Industrial Average history, a negative first half was followed by a negative second half only 40% of the time. For the first six months of 2015, the best day was up 323 points or 1.84%, and the worst day was down 350 points or 1.95%. This is proof that daily volatility doesn’t affect long-term investors as it all averages out over longer time periods.

Enjoy your summer days (and long days)!

As always, please contact us with any questions, news or comments.