PRO

CON

Evidence suggesting that index funds and a buy-and-hold strategy work best.

Evidence suggesting that more active investment strategies are successful.

Mid-1999

Two academic studies (described at right) reveal practical flaws in implementing two market-beating strategies.

Two academic studies find evidence to support two strategies for outperforming the overall stock market -- either by buying stocks recommended by analysts or by selecting particular mutual fund managers. But the studies also note that these strategies work only on paper, by disregarding the transaction costs of implementing such strategies in real life.

October 1999

How not to choose mutual funds.  If 10  investors started January  1998 by putting  money in each of 1997’s top 10 high-performing mutual funds, a year and eight months later the results aren’t pretty. All  but one  trail the S&P 500 and the Wilshire 5000 indexes. Four of the 10 are net losers. In other words, nine of these 10 hypothetical investors who tried for the gold in early 1998 have now fallen behind investors who put their money in S&P 500 or total-market index funds.

March 1999

Previous years’ performance gave no clue of mutual funds’ returns last year, said a study by Financial Research Corp. in Boston. The top 10% and bottom 10% of stock mutual funds in terms of  1- and 3-year performance reverted to average returns, as did funds that won Morningstar’s 3-, 4- and 5-year ratings. (Bloomberg News)

January 1999

Only 12 percent of actively managed stock mutual funds surpassed the S&P 500 in 1998.

For companies that declared a stock split, shares achieved a 14-percentage-point better return than the market average in the  13 months after the split, a review of five academic studies shows. (Orange County Register, Jan. 31)

December 1998

David Rights, market-timing fund manager of four retail Righttime mutual funds, predicted the mid-year downturn and moved his funds out of stocks and into cash. That bumped him to the top of his peer group for the short term -- through mid-October. But in the long term, his funds trail the S&P 500 by 6 percentage points and more. (Money, December 1998, p. 56)

July 1998

In a study of stock trading by 60,000 households from 1991 to 1996, economists at the University of California at Davis found that the returns for the most active traders averaged 10% a year, while the least active averaged 15%. (New York Times, July 23, 1998)

“David Shaw, a computer science professor turned Wall Street trader, believes that his chances are not much better than the odds of picking red or black correctly in roulette.” (New York Times, July 21, 1998)