Here are a few pretty damning statistics provided by Bank of America Merrill Lynch analysts. Only 14% of active managers are beating their benchmarks so far this year.
Over the last ten years, only 7% of managers of large-cap growth funds managed to beat their chosen indexes. The number is a little better when looking at large-cap blend funds, but not by much. It’s even worse if you live in Europe and own stocks through a mutual fund. Nearly all – as in 99% – of active managers have failed to outperform their benchmarks since 2006.
The culprit isn’t that everyone stinks at stock picking. That simply isn’t the case and the stats mentioned above don’t mean that investors lost money over these time periods. It’s simply that they haven’t met their benchmarks. The real reason for misses comes down to something we never really think about, and that’s costs.
What we pay for our investments has a huge impact on our bottom lines and in the case of mutual funds or ETFs, it can mean underperformance and, ultimately, having less money for critical needs like retirement.
But luckily, we can control costs, once we understand their impact.
