Here is more evidence that the best use of investment funds for the long term is low-cost (low management fees) index funds and passive management. The big endowment funds that used active management were out-performed over the past five and ten years by smaller endowment funds that relied more heavily on passive management, index funds, and low MERs [Management Expense Ratios]. The real take-away nugget appears well into the article from the NYTimes:
Vanguard said a simple mix of index funds with 70 percent in equities and 30 percent in fixed-income assets delivered an annualized return of 7.1 percent over the past five years, and 6.1 percent over the past 10. For a mix of 60 percent stocks and 40 percent bonds, the returns were 6.7 percent for five years and 6.1 percent for 10.
By comparison, the annualized returns for the billion-plus endowments were 6.1 percent for five years and 5.7 percent for 10.
Hedge funds, however, have successfully marketed themselves as offering higher risk-adjusted rates of return, in part because they supposedly minimize losses in down years. But according to Vanguard’s calculations, its simple, low-cost model portfolios have provided higher returns even after adjusting for risk in eight of the past 11 years.
I would love to be able to buy into such a set of mutual funds. But I can't without massive exposure to tax liabilities from the freakin' IRS. Grrr.
I know there are some people who beat the market consistently. They (and their investors) believe they are better/smarter than the hoi poloi of the marketplace. It's also possible they are just luckier: if 10,000 people flip a coin a hundred times each, a few just by chance will get strings of 20-30 heads in a row and 60-70 heads overall.