It’s Not a Debate

Much has been written about the issue of whether investors should limit their portfolios to index funds or attempt to “beat the market,” using actively managed mutual funds.

So, which is better?

Index funds simply track an index, giving investors the return of the index, less low management fees of the fund.  Fund managers of actively managed funds attempt to beat the performance of the index through stock picking and market timing.

Here’s all you need to know.  In 2017, less than 7% of Canadian actively managed funds beat the S&P/TSX Composite index.  This losing pattern repeats over more extended periods across all domestic stock categories, with less than one-quarter of funds outperforming.

Buying actively managed funds with a track record of outperformance is unlikely to be a winning strategy.  Relatively few funds can consistently stay at the top, which means that past performance provides no assurance of future outperformance.

“What about Warren Buffett?”.  We hear this question frequently.  Here’s his advice to investors: Invest in index funds and avoid those who claim the ability to “beat the market.”  That’s precisely the direction he gave to the trustee of his estate.

Here’s the bottom line:  It’s not impossible to beat a portfolio of index funds. But the odds of doing so are so small (especially after taxes), it makes no sense to try.

At the Danielson Group, we follow the evidence.  It supports avoiding stock picking, market timing and trying to select outperforming actively managed mutual funds.

We don’t believe it’s debatable.