The Big Picture: Yale Endowment Manager: Index:
You're not seeing the losers that disappear. They could
disappear because they go out of business or because cynical managers
of mutual funds will take poorly performing funds and merge them into
better-performing funds, and so the record of the poor performer
disappears. The picture that you get if you just look at the survivors
is dominated by the winners -- but of course investor dollars were
invested with the losers that disappeared.
And if you look at the aggregate results of the mutual-fund industry
on an after-fee, after-tax basis and adjust it for survivorship bias,
the probability that you are going to end up with market-beating
returns is de minimus. According to (Mr. Arnott's data), the 10-year
after-tax shortfall for mutual funds is 4.5% per year relative to what
you would have gotten if you had put your money in an index fund.
That doesn't even take into account the fees for advice ... which
takes you from a de minimus probability to a virtual certainty that you
will end up losing relative to the market.
Even better: buy the book.