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Why 90%+ of Active Stock Fund Managers Underperform the S&P 500

"They consistently do the opposite of what they should be doing for maximum return."

by Bob Stokes
Updated: April 17, 2017

Even professionals have a hard time beating the market. But a study of 2600 stock recommendations by market technicians vs. fundamentalists came to this "striking conclusion."

 

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[Editor's Note: The text version of the story is below.]

Many stock market fund investors ask themselves: "Why settle for a ho-hum return when I can possibly hit the jackpot with a really good fund manager?"

For those who have that goal -- good luck – because, for years, the majority of fund managers have underperformed the broad market, let alone beat it.

On April 12, CNBC reported:

Bad times for active managers: Almost none have beaten the market over the past 15 years

  • Some 66 percent of large-cap active managers failed to top the S&P 500 in 2016.
  • Performance actually got worse over longer time frames, with more than 90 percent missing benchmarks over a 15-year period.

And, remember, on top of the overall underperformance, active funds charge substantially higher fees than passive funds, or those which mirror the market.

We believe we know why most active fund managers underperform the market: The May 2016 Elliott Wave Theorist showed this chart and said:

It is widely known that professional money managers, in the aggregate, fail to beat the market. It is not, as some theorists say, because the market is random. It is because most professionals are herding, right along with most other speculators. The chart shows that at good prices for buying stock, mutual fund managers have high levels of cash, and at good prices for selling, they have low levels of cash. This record confirms that they consistently do the opposite of what they should be doing for maximum return.

Besides fund managers, our research shows that most other investor groups also herd. However, there are exceptions, and one of them is competent market technicians -- i.e., those investors who don't rely solely on "market fundamentals," but also track the market's psychology.

Let's return to the same Theorist:

A recent study of 2600 recommendations by technicians and fundamentalists on financial television and the Internet came to a striking conclusion: "Technicians display stock-picking skills, while fundamentalists reveal no value."

That said, keep in mind that Elliott wave analysis is also a form of technical analysis.

It's an approach to the market that is the polar opposite of "following the crowd."

This is a good time to find out about the key price levels we're watching so you can position your portfolio for the next major trend change we see ahead.

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