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With the Odds on Their Side, They Still Couldn’t Beat the Market

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Summary

This article discusses the difficulty of beating the stock market consistently, and the results of studies showing that the majority of actively managed mutual funds cannot beat the S&P 500 index over long-term periods. It then goes on to explain how the odds were in favor of stock pickers in 2022, yet most still failed to outperform the index. It suggests that the odds this year are even worse and that the best approach is to use low-cost index funds to match the returns of the stock and bond markets over the long run.

Q&As

How difficult is it for actively managed mutual funds to beat the stock market?
It is very difficult for actively managed mutual funds to beat the stock market.

What percentage of actively managed funds in the S&P 500 undershot the index in 2021?
About 51 percent of large-cap stock funds failed to beat the S&P 500 in 2021.

How did the performance of actively managed funds compare to that of passively managed funds in 2021?
In 2021, actively managed funds underperformed less badly than they have in most years, but they still underperformed.

What conditions in 2021 favored stock pickers the most?
In 2021, the average stock did better than the overall market, which was heavily influenced by a relative handful of “megacap” tech stocks. This meant the odds favored stock pickers last year.

Why is the performance of actively managed funds this year particularly dire?
This year, the megacap stocks have been outperforming the average stock in the S&P 500 index, and the equal-weighted version of the S&P 500 has been trailing the standard, cap-weighted index. This implies that if you just pick stocks randomly, odds are that you will trail the overall stock market this year.

AI Comments

👍 Jeff Sommer provides an insightful and comprehensive analysis of the stock market in this article. He explains the advantages of stock pickers in 2022, and why most of them still failed to beat the market.

👎 Jeff Sommer's article fails to provide any concrete strategies for stock pickers to outperform the market in 2023. He simply presents the facts and leaves readers to their own conclusions.

AI Discussion

Me: It's about how stock pickers struggled to beat the stock market in 2022, despite favorable conditions. It looks like the odds are worse for stock pickers this year.

Friend: That's really interesting. It seems like the article is suggesting that it's better to embrace humility and accept limitations when investing. What do you think are the implications of this article?

Me: I think the implications of this article are that it is difficult for stock pickers to consistently beat the stock market, and that investing in low-cost index funds is a better option for achieving average returns over the long run. It also suggests that it's important to have enough cash on hand to pay the bills before investing.

Action items

Research and compare different index funds to determine which one best fits your investment goals.
Consider diversifying your portfolio with a mix of index funds and actively managed funds.
Create a plan for managing cash reserves to help you weather market volatility.

Technical terms

S&P 500: Standard & Poor's 500 Index, a stock market index that tracks the 500 largest publicly traded companies in the US.
Index funds: A type of mutual fund that tracks a specific market index, such as the S&P 500.
Megacap stocks: Stocks with a large market capitalization, usually referring to the largest companies in the stock market.
Dispersion: The magnitude of differences in the returns of individual stocks in an index.
Equal-weighted version: A version of an index in which all stocks have the same weight, regardless of their market capitalization.
Money-market funds: A type of mutual fund that invests in short-term debt securities.