posted on January 23rd 2019 in Austin CFP Team Posts & Market Commentary with 0 Comments /

You’ve probably heard from the do-it-yourselfer at your office. “I just invest in the funds with the best performance.” But is this a reasonable? Though a book could be written citing numerous academic studies to address the validity of this “strategy,” I’ll cut to the chase by citing Dimensional Fund Advisors’ (DFA’s) annual study of U.S.-based mutual funds. Let’s answer a few basic questions.

Question: How many stock funds outperform their benchmarks, after costs?

Answer: Only about 26% over a 5-year period, and 14% over a 15-year period.

It’s important to note this study only includes funds that survived during the entire period. In other words, if we counted all the funds that shut down due to poor performance or other reasons, the numbers would look much worse. An older study by Morningstar (2011) revealed that only 54% of funds even survived a full 15 years!

Question: Do funds ranked in the top 25% (top quartile) of funds continue their streak over the next 3 years?

Answer: An average of only 26% of funds per year were able to stay in the top quartile for 3 more years.

There are a lot of reasons someone may consider changing or tweaking an investment strategy. Statistically speaking, recent underperformance of benchmarks is a poor reason. It doesn’t pay to chase returns. Further, chasing returns misses the point of investing. Many investments take time to pan out. Just as underperformance is very often followed by outperformance, outperformance is often followed by underperformance!


Nothing provided on this blog constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This blog is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.”
The information provided on this blog is for informational purposes only and investors should determine for themselves whether a particular service or product is suitable for their investment needs. Please refer to the disclosure and offering documents for further information concerning specific products or services.

about the author: Joshua I. Wilson CMT

Josh-Wilson CMTJoshua I. Wilson, CMT®, AIF® is a partner and wealth manager who has managed over $2B for TD Ameritrade. Joshua led the national training and development program for all of TDA’s new advisors and managers, won a national coaching award. Joshua gave his graduation speech at Brown University. Joshua is a Chartered Market Technician® (CMT®) and a Accredited Investment Fiduciary® (AIF®).

Learn more and/or Contact Joshua

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