The Amazing Power Of Two Simple Investing Ideas

The Capital Speculator writes: In theory, the recent increase in market volatility opens the door for superior results from active management. In practice, it’s still hard to beat relevant benchmarks. You wouldn’t know it from the promises from the usual suspects, but the numbers suggest another reality.

Every few months I like to review how my proprietary benchmark that passively weights all the major asset classes—the Global Market Index (GMI)—fares vs. a broad swath of actively managed multi-asset class funds. Once again, the results are typical: GMI delivered a competitive above-average return relative to the competition.

For example, consider GMI’s track record over the last 10 years through the end of this past July. This unmanaged, market-valued weighted index posted an annualized total return of 6.5% over that decade-long stretch. That translates into well-above average performance relative to more than 1,000 actively managed mutual funds and ETFs toiling away with a multi-asset class mandate of one form or another.

Using Morningstar Principia software, I screened for funds with at least 10 years of history in the following Morningstar categories: conservative, moderate, aggressive and world allocations, along with balanced funds. I looked only at distinctive portfolios to throw out various share classes of the same funds. The result was a hodge-podge of funds in excess of 1,000 products. A handful delivered stellar results. In fact, the leading fund has been nothing less than amazing (see black line in chart above). Maybe it’ll deliver equally strong results in the decade ahead. Then again, maybe not. GMI, on the other hand, is likey to remain an average, perhaps an above-average performer.

Presumably, high expectations also accompanied investors in the worst performing fund over the last decade. This unfortunate product somehow managed to suffer an annualized loss of 1.3% over the past 10 years.

The bulk of the funds did much better, of course, although the results are fairly mediocre. The fund in the 75th percentile—i.e., the fund that outperformed three-fourths of its competition—earned 5.2% a year. Not bad…..

WAti, wait - they're just starting. Find out more at http://www.capitalspectator.com/archives/2011/09/the_power_of_tw.html