berno financial management

Confirmation by the Numbers

The latest numbers exemplify what we've written about investing before: Don’t chase last year's best performers. Remember instead that consistency is important.

Don't Believe in Diversification? Check Out This Research

Over the years we have frequently written about two important principles in mutual fund selection as part of the portfolio management process:

  1. Most funds don’t beat a market benchmark over time.
  2. Fund winners rarely continue to be winners.

Dimensional Fund Advisors recently published updated research supporting these principles.   Here are the humbling facts.

On January 1, 2010, a mutual fund investor had 4,255 stock funds to choose from. Five years later, only 24% had outperformed their respective benchmark.

On January 1, 1995, a mutual fund investor had 2,955 stock funds to choose from. Ten years later, only 18% had outperformed their respective benchmark.

On January 1, 1990, a mutual fund investor had 2,711 stock funds to choose from. Fifteen years later, only 19% had outperformed their respective benchmark.

Do winners keep winning? The answer is no, and the results over three-, five- and 10-year periods are fairly consistent in the 25% range.

For the five years from 2010 to 2014, from the previous time periods ending in 2009, only 25%, 26% and 28% of the three-, five- and 10- year winners repeated successfully.

Moral of the story: Buy index funds in multiple asset classes for broad diversification.

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Speaking of forecasting, one of the stock market’s popular fables is “Sell in May and go away” based on the fact that May to October has historically been the worst six months of the year for the stock market. As reported in USA Today, since 1950 the Standard & Poor’s 500 index has averaged a 1.7% gain from May through October vs. a gain of 13.9% for the November to April period. But slicing and dicing the data further, as done by Ari Wald, a technical analyst at Oppenheimer, the S&P 500 tends to perform better in May, June, July and September when it’s in an uptrend, as it is now, heading into the summer months.

What’s more, stocks tend to rally into September in the third year of the four-year presidential cycle, especially in pre-election years with a sitting second-term president like President Obama. Investors who sold in May 2014 missed out on a 7.1% gain for the next six months.

All of this supports our mantra that our crystal ball is no clearer than yours and that predicting the short-term direction of the stock market is easier said than done!

As always, please contact us with any questions, comments or news. You can email me at or call 513-474-9191. I’m always happy to hear from you!

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