Trying to Beat the Market? Don't Bother

Index Universe - a great resource for ETF and mutual fund investors - just put out an analysis of the latest Standard & Poor's Index Versus Active Fund Scorecard and the results aren't pretty. According to Index Universe,

The new report shows that 71.9% of actively managed large-cap funds trailed the S&P 500; 75.9% of actively managed mid-cap funds trailed the S&P MidCap 400; and a stunning 85.5% of actively managed small-cap funds trailed the S&P SmallCap 600.

S&P says the results were consistent with the previous five-year cycle, from 1999 to 2003.

The article goes on to describe what can really only be described as pathetic performance of active mutual funds across various market cap sizes, global funds (including emerging markets where the performance of actively managed funds was especially attrocious compared to their index peers) and the bond market. One notable exception to the general rule of underperformance came in the high yield bond market. Other than that, the performance of actively managed funds vs. their passively indexed peers was either bad or awful.

Which leads me to wonder: Why does anyone bother trying to beat the market? Or to focus that, it's one thing for the pros to try - they have to believe they do what they do because they're really good at it (even if that's clearly not true year in and out). But why do individual, amateur investors try to beat the market? It seems like an excersize in futility at best and more likely than not, a surefire way to underperform the markets.

The bottom line is this: the average retail investor would be much better served buying the right mix of assets through low priced ETFs (expense ratios are the one factor most investors can - and often fail to - control). In addition to the added free time they'll gain (don't they say that time is money), they can rest assured they won't be underperforming the markets. Then they can spend their time evaluating what level of risk they can tolerate - something which came as a shock to many who thought it was much higher than it really was during the recent downturn. Switching into low-risk bonds when they Dow fell below 10,000 would have been a much more fruitful strategy for most than trying to outmaneuver a sinking ship of a market over the last year and a half.