James Picerno | Jan 09, 2013 06:13AM ET
It's true for stocks, it's true for bonds—yes, it's even true for hedge funds. As The Economist reported back in October:
GMI ended up near the 75th percentile for performance. That's probably high relative to what you should expect for the next 10 years. But average to above-average results are good bet, in part because you can replicate GMI for less than 50 basis points with ETFs. By contrast, the active strategies depicted in the chart above nip you for two, three, and even four times as much. Over time, that's the equivalent of trying to run a race with a couple of bricks tied to your feet.
These types of studies are now a staple in financial research. The lesson for most folks is that broad diversification across asset classes, and periodic rebalancing of those assets, will capture average to above-average returns on a fairly reliable basis through time. The flip side of this lesson is that trying too hard in money management boosts the odds of ending up with high-priced mediocrity, or worse.
Granted, a relative few will beat the odds. Predictably, this is where the crowd focuses. The dirty little secret, however, is that the upper decile or quartile of performers is often a fluctuating mix of names. By contrast, a representative benchmark is a dependably average to above-average performer. This empirical fact, however, is the equivalent of a wet rag when it comes to popularity contests among investment strategies. Considering the returns that most folks end up with, however, that's a costly oversight.
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