unclescrooge wrote:This is indisputable (except by people that deny math and facts, of which I sadly know several).
So why do pension funds and endowments (which collectively are the market) continually try to beat it?
1. Arrogance and Stupidity
Enough said on this point.
2. Why do you think they don't beat the market?
Consider these points.
Certain higher fees - those associated with active management rather than marketing - have shown to have higher gross returns (before fees) than those with lower fees. The problem here for the ordinary investor is that portfolio managers have a better feel of their value than you do, and they charge their management fees accordingly. Trying to find a superior manager is about as hard as finding a superior single stock to invest in.
3. Why do you think they want market returns?
Lets start with pensions funds as a easy example. What they want is low risk constant returns, not market returns. They are willing to trade upside market participation for downside protection. They may tilt their portfolio more towards value and low beta stocks.
This is how you are supposed to create your Asset Allocation:
1. State your goals
2. State your risk tolerance.
3. State your market expectations.
4. Create a custom index / asset allocation which optimizes for the prior 3 points.
This is expensive to implement. Most individual investors are better off using generic index products. They are pretty good and very cheap. Think custom tailored suit vs. off the rack. For most people "off the rack" is the more efficient choice. The big boys however can justify the higher expense to get exactly what they need.
A specific example is REITs. We have gone back and forth on if one should overweight REITs. However, something that is even better than REITs is direct holdings of real estate. Direct holdings does a even better job of diversification than REITs. However, they are illiquid, to get the necessary diversity you need to invest in over a dozen different projects, etc. The correct answer for a pension fund or foundation would be to buy direct holdings of real estate, then underweight REITs in their stock holdings. Here, you don't even want market returns.