In most endeavors, there are things you can control and things you can't. That's true in life. That's true in business. That's true with investing. The good news about investing is that markets have rewarded investors over the long term. But over the short term—as anyone who has paid attention to markets knows—markets go up and markets go down. I thought it would be helpful to share some observations about the investment business and what it takes to have a good experience.
Few things have been studied as extensively as the performance of professionally managed funds. While the results indicate that some managers have good track records, there are far fewer of them than you would expect by chance.
What does that mean to investors? It means that even after analyzing all the data, you can’t separate skilled money managers from lucky ones. And if you can’t identify superior managers after the fact, how can you identify them in advance? Based on the overwhelming evidence, there is no magic to investing.
The data shown here is derived from the CRSP Survivorship-Bias-Free Mutual Fund Database and Ken French's data library. Methodology based on Fama and French (2010). Please see disclosure in Appendix for important information regarding bootstrapped simulations and methodology details. Fama, Eugene F., and Kenneth R. French. 2010. "Luck versus Skill in the Cross-Section of Mutual Fund Returns." The Journal of Finance 65(5) (2010): 1915-1947. Meyer-Brauns, Philipp. 2016. "Mutual Fund Performance through a Five-Factor Lens." Dimensional Fund Advisors. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.
Throughout their lives, people must continually deal with uncertainty and make choices—what school to attend, what career to pursue, where to live, and so forth. You make these decisions without knowing the outcomes. You look at all the possibilities, and then you decide.
Much of the financial services industry is geared toward making people think they can eliminate uncertainty in investing. However, the future is unknowable. The best approach to dealing with uncertainty is to make informed choices, adjust as your needs and objectives change, and be comfortable with the range of possible outcomes.
The sample includes funds at the beginning of the 15-year period ending December 31, 2017. Survivors are funds that had returns for every month in the sample period. Winners are funds that survived and outperformed their respective Morningstar category benchmark over the period. US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Past performance is no guarantee of future results. See Appendix for more information.
A philosophy serves as a compass to guide you through turbulent times. When you’ve got a compass, it doesn’t take drastic directional changes to find your way. Small adjustments are all you need to stay on course.
In 2009, the US stock market was down more than 50%, which seems to happen about once every generation. A lot of people were stressed out by the uncertainty, so they cashed out. That locked in their losses. The market, as it turned out, rebounded and some of those people who got out of the market may have to wait decades to get back to where they were. It’s unfortunate they didn’t stick it out so that they could have better weathered the storm.
Past performance is not a guarantee of future results. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual fund. S&P 500 Index (Total Return) data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Trust involves many different parts. To trust markets, you must understand how they work, which means having a source of reliable knowledge. The best source is scientific research, not opinions and hunches. You must also trust the professionals who are managing your investments, which should involve a clear understanding of what services and expertise you are buying and what you are paying in fees and costs.
Most people lack the knowledge to manage their own investment portfolio. A trusted financial advisor can help you figure out your goals, present different ways of forming portfolios, and ensure you understand the possible distribution of outcomes. This way, you can make informed choices about how to invest. Your advisor then keeps watch over what is happening, and together you revise your investment plan if needed.
Investing is a dynamic process and a lifelong journey. It’s having a philosophy you can stick with, considering the range of possibilities, and adjusting along the way. These are the keys to a better investment experience. Stay disciplined, control what you can control, and keep a long-term view on your destination so you can focus on what really matters and enjoy your life.
Question 2: The sample includes funds at the beginning of the 15-year period ending December 31, 2017. Each fund is evaluated relative to the Morningstar index assigned to the fund’s category at the start of the evaluation period. So, if, for example, a fund changes from Large Value to Large Growth during the evaluation period, then its return will still be compared to the Large Value category index. Surviving funds are those with return observations for every month of the sample period. Winner funds are those that survived and whose cumulative net return over the period exceeded that of their respective Morningstar category index.
Question 3: This study evaluated fund performance persistence over rolling periods from 2001 through 2017. Each year, funds are sorted within their category based on their previous three-year total return. Those ranked in the top quartile (25%) of returns are evaluated over the following three-year period. The chart shows the average percentage of top-ranked equity and fixed income funds that kept their top ranking in the subsequent period.
Questions 2 and 3: US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Index funds and fund-of-funds are excluded from the sample. See Dimensional's “Mutual Fund Landscape 2018” for more detail, including Morningstar categories included in the fund samples. Past performance is no guarantee of future results.