
Indexes Beat Stock Pickers Even Over 15 Years - dsacco
https://www.wsj.com/articles/indexes-beat-stock-pickers-even-over-15-years-1492039859?utm_medium=email&utm_source=newsletter&utm_term=170413&utm_campaign=ritholtz
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nabla9
Recent paper giving new insight why indexing works so well.

Why Indexing Works, Heaton , Polson and Witte, 2015.
[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262)

The distribution of returns in the stock market is very uneven. There is
significant positive skew. Just handful of well performing stocks at any
moment account make significant gains in market.

> The risk of substantial index underperformance always dominates the chance
> of substantial index outperformance, with the difference being greater the
> smaller the size of the selected sub-portfolios. It is far more likely that
> a randomly selected (small) subset of the 500 stocks will underperform than
> overperform, because average index performance depends on the inclusion of
> the extreme winners that often are missed in sub-portfolios.

Index funds pick these winners every time. Active funds start as underdogs
even in the stock picking game.

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dsacco
Apologies for the paywall folks; if anyone is interested in reading the
original research WSJ is reporting on, this is it:
[http://us.spindices.com/documents/spiva/spiva-us-year-
end-20...](http://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf)

The Cliff's Notes are these:

* 82% of _all_ U.S. funds trailed their respective benchmarks over 15 years.

* 66% of large-cap actively managed funds trailed benchmarks.

* 89.4% of mid-cap actively managed funds trailed benchmarks.

* 85.5% of small-cap actively managed funds trailed benchmarks.

