Stock market investors tend to put their money into managed mutual funds. That seems smart given that the fund managers are full time stock pickers. It's why investors have put $4.5 trillion in managed funds, compared to just $508 billion in index funds.
But surprise! Most of those so-called expert stock-pickers are wrong much of the time. As a result, odds are that your investments will do better if you pick stocks by throwing darts at the stock tables.
I know that doesn’t seem to make sense, but it’s true: A study in the Journal of Economics & Portfolio Strategy found that, out of the 452 funds listed for the last 20 years, just 13 -- less than 3% -- beat the market by more than they charged in fees.
On my FBN show tonight, I interview a professor I had in college -- Burton Malkiel, the author of A Random Walk Down Wall Street. When it was first published, it was widely rejected. A review of the book in Business Week said… this is the dumbest book that ever existed.
But now, people are catching on. Since 2006, managed funds have seen outflows every year. Index funds saw inflows.
In general, Malkiel notes on my show, managed funds underperform the market by about the amount they charge in fees:
Malkiel: With an index fund or an ETF, you pay almost zero expenses. The average actively managed fund charges about 1 percentage point a year. This is a game where they underperform by the amount of their excess expenses. This is a game where you get what you don't pay for.
And what about people like George Soros, Warren Buffet, and my brother in law, Michael Steinhardt? Steinhardt averaged 24% returns after fees— for 29 years.
Malkiel: "Sure, there are always some people who will beat the market and you're right. Warren Buffet is an exception. And there'll be Warren Buffets in the future. But the problem is you don't know who they are. I don't know who they are... It's like looking for a needle in a haystack -- I say, buy the haystack."
In other words: Index funds. That’s where I put my money.
Full disclosure: Steinhardt now chairs an index fund.