This was the headline of an article posted on the Wall Street Journal website on the 4th of January. The article posed this question:
During a market comeback, is it best to be invested in actively managed funds that aim to beat their benchmarks? Or is it better to stick to index funds that simply rise with the tides?
The article provided insights from a range of US analysts. Click on the following link to be taken to the article - Active or Index Funds for '09?
Lets start with the argument against indexing.
Some investors argue that by investing in a fund that mirrors an index you are holding not only the fastest-rising sectors but also the laggards. An active manager may be able to avoid the low performers and use cash to nimbly pick up shares of companies that are growing ahead of the market.
Unfortunately the evidence is against this theory. Take a look at our Active Fund Managers Underperform page on our website.
Unfortunately the evidence presented in the paper suggests that such an approach is risky because in the recoveries from the past three bear markets, index funds have come out ahead of managed funds on average, according to data from researchers Lipper Inc. and Morningstar.
Over the 12-month period following the most recent bear market in the USA that ended in March 2002, less than 30% of actively managed funds beat their benchmarks, according to Morningstar.
Another interesting statistic included in the article was that "actively managed funds certainly didn't shine versus index funds last year, with some 58% of actively managed U.S. stock funds failing to beat their benchmark indexes in 2008, according to Morningstar."
Our approach at A Clear Direction is that we firstly do not know whether there will be a rebound in markets in 2009. We certaintly hope so but we (along with all other commentators and experts) have no skill or ability to make this prediction. Rather, we continue to build investment portfolios for clients taking into account the risk that markets may fall further but also based on the historical data that shows that market will rebound some time in the future as they have done so in the past.
We do this not by picking active managers or trying to time entry into and out of the market but by using index funds based using the 3 factor model of how markets work. If you wanted to know more about this approach please take a look at our Building Portfolios and Research Based Approach pages on our website.
My answer then to the initial question - Index funds for 2009 and beyond!!