Mutual funds that beat index funds in the long run

[ottoman_javier]

I have been sifting through mutual fund data on and off for the past few months through Fidelity and Schwab which give access to data of close to 10,000 mutual funds. I have tried to compare the best performing funds for the longest time scales (> 40 years) to popular index funds, that have low turnover ratios, no front/back loads or transaction fees (with the right broker ). I would like to share what I have learnt and hope to get some feedback and learn some more.

For large cap stocks, there are funds that have beaten S&P500 consistently for over 40-50 years. Fidelity's Contrafund has beaten the market since inception in the 60s. Fidelity growth company and blue chip growth since the 80s. American century's large cap funds (TWCIX, TWCGX, TWCUX) since 70s. I have been informed that the S&P500 can reliably be tracked to the 1950s (even though the market can be tracked to the start of the century with some reliability), which means that some of these finds have beaten it for most of its life. In any case these funds have beaten the available S&P500 mutual funds for their entire life. Of course, they have not beaten the Russell 1000 growth index which, one can argue, is the more suitable benchmark as it targets more growth oriented stocks. But unless one is wiling to put their entire large cap portfolio into a Russell 1000 index fund, these funds have done better. I am not considering sector specific funds for this discussion but broad market funds.

Some large cap funds that have handsomely beaten the S&P500 for > 50 years, have not done well in the last 10-15 years. For new investors, their average return since inception is misleading. Two great examples of this are the popular Fidelity Magellan Fund and the Sequoia Fund. Magellan fund has beaten S&P500 by 5% annually over its life, but has mostly followed the S&P500 lately. Sequoia has done much worse lately, underperforming by around 5% in the last 10 years. This is not the case with the funds I have mentioned. they have outperformed both in the short term and since inception.

For mid and small cap stocks, situation is more complicated to get a clear answer. I can't find index funds in the small and mid cap range that go beyond the late 1990s. Comparing a funds NAV to an index is not the same as comparing to an index fund since we need to account for expenses, reinvestment of distributions etc. Please let me know if there are small and mid cap index funds older than 30 years. Even with indices some have done better than others (SP600 small cap, Russell 2000, CSRP small cap etc). One can find quite a lot of funds that beat the corresponding indices by several percent for the past 10-15 years. In fact the small cap funds have beaten the index funds (VIMAX, VMCIX, VSMAX, SWSSX, FSDMX) by much wider margin than the large cap funds have with S&P500 but it is not clear if they had done that earlier than 2000 due to this issue. Some of these funds like (RPMGX, GTSGX, WGROX, CSMVX) have been operating for 30 years and longer and have beaten the small and Mid cap index in the last 10 years by 2-5% margins.

Some thoughts after looking at this data. For analysis in the short term (10-15 years), it seems that the small cap stock funds tend to outperform the relevant index with wider margins. The margins reduce with large cap funds. This makes some logical sense since small cap indices have thousands of stocks unlike SP500, and would take in a lot of garbage companies that tend to be more prevalent in the small cap than large cap. For the large cap, the growth oriented indices are not beatable like the Russell 1000 growth. Since large cap stocks form majority of a stock part of a portfolio, this would imply that most of the investment would be in index funds. But the index would have to be better than the S&P500 like the Russell 1000. If majority of a portfolio's large cap stocks are in S&P500 index, then the actively managed funds I mentioned at the beginning will have beaten it.

Let's assume a typical investment timeline for retirement of about 35 years (age 30-65). If I was retiring now and cashing out my accounts invested in S&P500 or total market index funds that perform about the same, for 35 years, I would be kicking myself for not investing with Fidelity's or American century's funds. For some of these over a 35 year time, the different in account balance would be over 2x.

The question is, is a 55 year track record of outperformance enough to choose an actively managed fund over an index fund, noting that even the oldest index funds are younger than this? One could keep waiting for reversion to mean which has not arrived for half a century. Please let me know your thoughts on these investments and how to tackle this question.

[Doctor Rhythm]

Welcome to the forum.

You know that mandatory statement about “past performance does not guarantee…blah, blah, blah..?” I take it at face value and don’t try to add any qualifiers.

[ottoman_javier]

Welcome to the forum.

You know that mandatory statement about “past performance does not guarantee…blah, blah, blah..?” I take it at face value and don’t try to add any qualifiers.

The same could be said for an index fund. Why do we seem to ignore this statement for indices? By this logic, It is not impossible, that the index funds underperform the savings rate for the next decade and one would be better off in a CD.

[Peculiar_Investor]

Welcome to the Bogleheads.

You might want to read though SPIVA U.S. Mid-Year 2023 - SPIVA | S&P Dow Jones Indices

Although active managers in a number of categories were able to outpace their benchmarks in the first six months of the year, in our largest and most closely watched comparison, 60% of all active large-cap U.S. equity managers underperformed the S&P 500. As Exhibit 1 illustrates, a majority of large-cap managers outperformed in only 3 of the last 23 years (missing by a whisker in 2022). But active underperformance is not a coincidence, and, as we will discuss, some of the factors that made it close last year worked in the opposite direction in the first six months of 2023.

This conclusion is repeated over and over again in previous reports. Look at their first exhibit mentioned in the quoted material.
 


"Don't look for the needle in the haystack. Just buy the haystack." John C. Bogle

[Chuckles960]

When you look at the great performance of Fidelity Growth Co. (FDGRX) and Fidelity Blue Chip Growth (FBGRX) , what you are seeing is the explosive growth of the tech sector over the last several decades (in spite of some stomach-churning downturns). Will it continue in future, with AI and robotics? No idea. When a stock or MF goes up, this allows us to predict that it will either (a) go up further (b) go down or (c) stay flat. Guaranteed.

Certainly tech should not be your primary investment, but risking money you can afford to lose may be appropriate. (I do have maybe 10% in FBGRX and it has served me well---but, for example, it dropped something like 40% last year, bouncing back this year.)

Note that FDGRX is closed.

PS Fidelity Magellan is an object lesson. In the nineteen eighties it was a huge deal, with its star manager outperforming the S&P by huge margins. Then its performance just tanked, yet it kept untold billions in deposits for many years because many people who had put their trust in it had decided to buy and hold.

[tibbitts]

Welcome to the forum.

You know that mandatory statement about “past performance does not guarantee…blah, blah, blah..?” I take it at face value and don’t try to add any qualifiers.

The same could be said for an index fund. Why do we seem to ignore this statement for indices? By this logic, It is not impossible, that the index funds underperform the savings rate for the next decade and one would be better off in a CD.

It's reasonable to compare an active fund to an index fund in the same asset class. It's irrelevant to compare an equity index (or active) fund to fixed income. Certainly it's possible that any of the active equity funds you mentioned, or any equity index funds, could underperform fixed income for decades going forward... which is one reason why (almost) all of us also hold fixed income. If we were ignoring the statement, we wouldn't invest in other asset classes.

[gavinsiu]

I think one issue you may encounter is the average return vs what's being return currently. For some funds, the early return are so overwhelming that it gives the fund a high average return but the recent returns are not nearly as good. People who invest later gets the lower return.

You also have to factor in what makes the fund so special. Is it the team? Is it the manager? Firms like Fidelity like to highlight their managers in various profile, but they also shuffle them around a lot. When I invested in active managed funds a long time ago, I would often get annoyed when my manager get shifted to a different fund, and I have to make a decision whether to go to the new fund, since at the time I thought it was the manager.

The reason I don't' do active fund, it's too risky. Too many unknowns.

[nisiprius]

Suppose a friend told you that certain fund had beaten the S&P 500 in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, and 2005. Fifteen years, literally every year, perfect consistency, no exceptions. And told you that the manager who achieved that was still running the fund, had won numerous industry awards, and had even had a book written about him. And your friend said he was going invest heavily in it, because "even if he doesn't manage to beat the S&P 500 next year, I think my money will be safe there."

What would you say to that friend?

[ottoman_javier]

Welcome to the Bogleheads.

You might want to read though SPIVA U.S. Mid-Year 2023 - SPIVA | S&P Dow Jones Indices

Although active managers in a number of categories were able to outpace their benchmarks in the first six months of the year, in our largest and most closely watched comparison, 60% of all active large-cap U.S. equity managers underperformed the S&P 500. As Exhibit 1 illustrates, a majority of large-cap managers outperformed in only 3 of the last 23 years (missing by a whisker in 2022). But active underperformance is not a coincidence, and, as we will discuss, some of the factors that made it close last year worked in the opposite direction in the first six months of 2023.

This conclusion is repeated over and over again in previous reports. Look at their first exhibit mentioned in the quoted material.
 


"Don't look for the needle in the haystack. Just buy the haystack." John C. Bogle

Let's stipulate for this discussion that over 90% of funds don't beat the index (looks like 87% is the largest number in the chart you show). I submit to you that it is incredibly misleading to tell people who have little knowledge of statistics. First. for over 3000 US equity funds one can find at a broker, you are still left with 150 funds. It only takes a handful of funds to make a portfolio. But even ignoring that, the 90% number is relevant only if you blindly pick a set of funds at random, like in a draw. Then you will fail 90% of time. But data analysis filters out most of the junk. A 50 year history comes in handy here and skews the odds in your favor. Note that the history I am talking about is longer than the oldest index fund history. But What do you think of this hypothetical? if I were to give you the fund prospectus of the funds I have listed early in my post and an SP500 fund and redact all the names of the funds so you don't know which is which, the AAR and timescale alone would force one to pick the active managed funds. Would they not?

[ottoman_javier]

I think one issue you may encounter is the average return vs what's being return currently. For some funds, the early return are so overwhelming that it gives the fund a high average return but the recent returns are not nearly as good. People who invest later gets the lower return.

You also have to factor in what makes the fund so special. Is it the team? Is it the manager? Firms like Fidelity like to highlight their managers in various profile, but they also shuffle them around a lot. When I invested in active managed funds a long time ago, I would often get annoyed when my manager get shifted to a different fund, and I have to make a decision whether to go to the new fund, since at the time I thought it was the manager.

The reason I don't' do active fund, it's too risky. Too many unknowns.

That's a reasonable point. It is indeed a question of who is responsible for the outperformance (manager, team etc). Certainly more variables and with that more risk. I suppose the confidence would be higher if the fund did well under multiple leaders for multiple decades. But certainly more headache to find investments. But I am a scientist by training and attracted to the pain of data analysis!

[Doctor Rhythm]

Welcome to the forum.

You know that mandatory statement about “past performance does not guarantee…blah, blah, blah..?” I take it at face value and don’t try to add any qualifiers.

The same could be said for an index fund. Why do we seem to ignore this statement for indices? By this logic, It is not impossible, that the index funds underperform the savings rate for the next decade and one would be better off in a CD.

Of course, unpredictability applies to index funds too, but I doubt anyone on this forum ignores this. In fact, it’s so baked in as a core assumption, that we don’t need to discuss it except when a newbie seems naive to it.

Over the next decade, a total stock index fund might underperform bonds, cash, and might even suffer a net loss. That’s happened before, including to me (eg, 2000-2010) and everyone here who has been investing long enough. It will almost certainly happen again.

But…so what of it?

If it’s an intolerable thought, don’t own stocks (or at least, don’t own much too much, which is generally good advice for everyone). It’s certainly not an argument for active portfolio management.

ETA: What is your personal investing question? It seems like you’re more interested in debating theory and hypotheticals — which are more appropriate for another sub forum.

[ottoman_javier]

When you look at the great performance of Fidelity Growth Co. (FDGRX) and Fidelity Blue Chip Growth (FBGRX) , what you are seeing is the explosive growth of the tech sector over the last several decades (in spite of some stomach-churning downturns). Will it continue in future, with AI and robotics? No idea. When a stock or MF goes up, this allows us to predict that it will either (a) go up further (b) go down or (c) stay flat. Guaranteed.

Certainly tech should not be your primary investment, but risking money you can afford to lose may be appropriate. (I do have maybe 10% in FBGRX and it has served me well---but, for example, it dropped something like 40% last year, bouncing back this year.)

Note that FDGRX is closed.

PS Fidelity Magellan is an object lesson. In the nineteen eighties it was a huge deal, with its star manager outperforming the S&P by huge margins. Then its performance just tanked, yet it kept untold billions in deposits for many years because many people who had put their trust in it had decided to buy and hold.

For long term investments one must be ready for large drops, that must be accepted or one should not invest. But to your point of outsized gains due to technology sector in some of the funds I listed. I agree, that is the case. But the indices have the same issue. The Russell 1000 and SP500 have over-representation of tech stocks. The Americana century funds are better in that regard than the fidelity ones. I don't think there is any avoiding the tech ups and downs even if you are in index funds. Let me know if you agree with that assessment. The Megallan and Sequoia are a big red flag that I have seen while looking at the data. I think for all funds downturns will eventually come. But the reason we don't think like that for index funds is that they are the benchmark. there is nothing to compare them to. I would say if the SP500 was a managed fund, benchmarked against another index, we would be criticizing it too. Let me know what you think of this.

[ottoman_javier]

Welcome to the forum.

You know that mandatory statement about “past performance does not guarantee…blah, blah, blah..?” I take it at face value and don’t try to add any qualifiers.

The same could be said for an index fund. Why do we seem to ignore this statement for indices? By this logic, It is not impossible, that the index funds underperform the savings rate for the next decade and one would be better off in a CD.

It's reasonable to compare an active fund to an index fund in the same asset class. It's irrelevant to compare an equity index (or active) fund to fixed income. Certainly it's possible that any of the active equity funds you mentioned, or any equity index funds, could underperform fixed income for decades going forward... which is one reason why (almost) all of us also hold fixed income. If we were ignoring the statement, we wouldn't invest in other asset classes.

No that was not my point. I know not to compare asset classes. I threw a hypothetical to show that if the past performance..... statement was actually taken as correct, one would be paralyzed by it and not invest in anything. The entire reason to put money in index fund, as repeatedly stated, is its part performance. That is the double-standard I am pointing to. Why even invest in index if past performance is of no use? The only thing we have to look at is the past performance. Without that we have no tool to investigate stocks and would have to pick randomly, or worse rely on forecasters.

[tibbitts]

Let's stipulate for this discussion that over 90% of funds don't beat the index (looks like 87% is the largest number in the chart you show). I submit to you that it is incredibly misleading to tell people who have little knowledge of statistics. First. for over 3000 US equity funds one can find at a broker, you are still left with 150 funds. It only takes a handful of funds to make a portfolio. But even ignoring that, the 90% number is relevant only if you blindly pick a set of funds at random, like in a draw. Then you will fail 90% of time. But data analysis filters out most of the junk. A 50 year history comes in handy here and skews the odds in your favor. Note that the history I am talking about is longer than the oldest index fund history. But What do you think of this hypothetical? if I were to give you the fund prospectus of the funds I have listed early in my post and an SP500 fund and redact all the names of the funds so you don't know which is which, the AAR and timescale alone would force one to pick the active managed funds. Would they not?

No, if you start with the assumption that past isn't prolog, you won't be "forced" to pick the active funds. However I agree completely with your point about it being misleading to say that 90% of active funds "don't beat the index", as long as you limit your selection process to factors like expenses, not past performance. Actually the expense ratio analysis is complex because many funds have performance-based ratios, and you don't want to punish a well-performing fund by excluding it.

I would also disagree with using only a handful of active funds. The odds and impact of failure are too high. You can argue 20 or 40 or 60 but not 5. So it would be interesting to see the result if you applied your performance selection criteria 30 years ago, using data available at that time. Would you use a rotation scheme for removing funds from your portfolio if they falter while you own them? And of course we're assuming no tax.

[Chuckles960]

I don't think there is any avoiding the tech ups and downs even if you are in index funds.

It is not the same. Quantitatively, FBGRX/FDGRX/Nasdaq fluctuate more than the S&P. It is a question of how much risk you are willing and able to handle, your time horizon, etc. It is a subjective decision.

Just don't fool yourself that you can predict the future. Risk does not just mean short term fluctuations---for example you could decide you're a long term investor and hold for 25 years, then realize that you have done poorly (viz. Magellan).

But data analysis filters out most of the junk. A 50 year history comes in handy here and skews the odds in your favor.

This is total nonsense.

[oldcomputerguy]

This topic is now in the Investing - Theory, News & General forum (general investing discussion).

[ottoman_javier]

Suppose a friend told you that certain fund had beaten the S&P 500 in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, and 2005. Fifteen years, literally every year, perfect consistency, no exceptions. And told you that the manager who achieved that was still running the fund, had won numerous industry awards, and had even had a book written about him. And your friend said he was going invest heavily in it, because "even if he doesn't manage to beat the S&P 500 next year, I think my money will be safe there."

What would you say to that friend?

would say two things. One is that 15 years is too small to determine if it will beat the market or even if it is safe. That's why the funds I mentioned in my post have between 40-55 year history. This much time means that it is not entirely the genius of the fund manager as many managers would have come and gone in that time. Which takes me to the second point.

I would tell my friend to not follow an individual, looking at their awards accolades books etc. It is not a good idea to put hope in person. I would ask them to stick to the data in the funds prospectus.

[Peculiar_Investor]

But data analysis filters out most of the junk. A 50 year history comes in handy here and skews the odds in your favor.

That is data mining and survivor bias. It is easy to pick winners after the fact. "Making predictions is hard, especially about the future" attributed to Niels Bohr and Yogi Berra (and others).

Since you are new here, remember this is the Bogleheads forum, which is "Investing Advice Inspired by Jack Bogle". Bogle long ago debunked your thesis.

[exodusNH]

No that was not my point. I know not to compare asset classes. I threw a hypothetical to show that if the past performance..... statement was actually taken as correct, one would be paralyzed by it and not invest in anything. The entire reason to put money in index fund, as repeatedly stated, is its part performance. That is the double-standard I am pointing to. Why even invest in index if past performance is of no use? The only thing we have to look at is the past performance. Without that we have no tool to investigate stocks and would have to pick randomly, or worse rely on forecasters.

No.

Index funds are not making a bet on past performance. They simply set criteria for inclusion and apply it robotically. (Though there is some randomness and buffer to prevent people front-running index changes and to keep a company from bouncing between indexes. For example, if the threshold is $100M in market value, you don't want to mechanically drop it at $99.9M just to have to add it back a week later.)

You may consider yourself a data analyst, but what you're trying to do is impossible. You simply can't pick future winners by looking at past ones. Highly-credentialed academics, including those having won Nobel Prizes and Fields Medals have not been able to do it.

Performance chasing is common. Lots of people throw money at recent winners and wind up losing. Look at the ARK funds. When Morningstar rejiggered their star ratings to separate out funds by class, money poured out of the newly down-ranked funds into the new 4&5 star ones.

Good people can outperform the market. But it is a more than full-time job. And generally, after expenses they might match the market, though usually underperform in the long run.

Even Morningstar has stated that the only data element that predicts performance is cost. I.e., cheaper funds wind up performing better.

[ottoman_javier]

I don't think there is any avoiding the tech ups and downs even if you are in index funds.

It is not the same. Quantitatively, FBGRX/FDGRX/Nasdaq fluctuate more than the S&P. It is a question of how much risk you are willing and able to handle, your time horizon, etc. It is a subjective decision.

Just don't fool yourself that you can predict the future. Risk does not just mean short term fluctuations---for example you could decide you're a long term investor and hold for 25 years, then realize that you have done poorly (viz. Magellan).

But data analysis filters out most of the junk. A 50 year history comes in handy here and skews the odds in your favor.

This is total nonsense.

If a 50 year history is total nonsense, it is unreasonable to invest in any SP500 index fund sine the history on that is shorter. I could be wrong but I thought the basis of index fund philosophy is that most active portfolio will average towards it in the long run since no one can pick winners all the time. So why bother with higher fee and trust in a manger for no reason. Is that not so? if it is so, then this is a statement based on historical data. If you want to ignore data, why believe in the index fund philosophy?

[ottoman_javier]

No that was not my point. I know not to compare asset classes. I threw a hypothetical to show that if the past performance..... statement was actually taken as correct, one would be paralyzed by it and not invest in anything. The entire reason to put money in index fund, as repeatedly stated, is its part performance. That is the double-standard I am pointing to. Why even invest in index if past performance is of no use? The only thing we have to look at is the past performance. Without that we have no tool to investigate stocks and would have to pick randomly, or worse rely on forecasters.

No.

Index funds are not making a bet on past performance. They simply set criteria for inclusion and apply it robotically. (Though there is some randomness and buffer to prevent people front-running index changes and to keep a company from bouncing between indexes. For example, if the threshold is $100M in market value, you don't want to mechanically drop it at $99.9M just to have to add it back a week later.)

You may consider yourself a data analyst, but what you're trying to do is impossible. You simply can't pick future winners by looking at past ones. Highly-credentialed academics, including those having won Nobel Prizes and Fields Medals have not been able to do it.

Performance chasing is common. Lots of people throw money at recent winners and wind up losing. Look at the ARK funds. When Morningstar rejiggered their star ratings to separate out funds by class, money poured out of the newly down-ranked funds into the new 4&5 star ones.

Good people can outperform the market. But it is a more than full-time job. And generally, after expenses they might match the market, though usually underperform in the long run.

Even Morningstar has stated that the only data element that predicts performance is cost. I.e., cheaper funds wind up performing better.

I think you are putting a strawman against me. I have not attempted to look for recent winners. My analysis specifically ignores recent winners since I go for funds that have market beating records older than the oldest index mutual funds (40-55 years). My analysis specifically avoids sector specific stocks like ARK and furthermore ignores stocks that have outperformed their average performance by a large margin to reject speculation. I am very much against chasing high performers and jumping between them. My entire post is geared towards picking a lifetime investment based on the funds I mention. I even say that active fund performance is not reliably gauged for small caps due to a short 10-20 year history of index funds in that class. Let's stick to what I actually said.

To your point about index fund not betting on past performance, that is not the case. Ask the Japanese investors who put their money in the Nikkei market index, what they think. I bet they would not say that reliance on a formula is better. the reason we think reliance on the SP500 formula is better is solely that it has worked, nothing else. It is a very much bet on the American economy, that it will grow in the future, since it has done that as far as the US history goes. It is only in hindsight that we now think that indexing strategy is better and try to justify it. It does not work in every market.

[ottoman_javier]

Welcome to the forum.

You know that mandatory statement about “past performance does not guarantee…blah, blah, blah..?” I take it at face value and don’t try to add any qualifiers.

The same could be said for an index fund. Why do we seem to ignore this statement for indices? By this logic, It is not impossible, that the index funds underperform the savings rate for the next decade and one would be better off in a CD.

Of course, unpredictability applies to index funds too, but I doubt anyone on this forum ignores this. In fact, it’s so baked in as a core assumption, that we don’t need to discuss it except when a newbie seems naive to it.

Over the next decade, a total stock index fund might underperform bonds, cash, and might even suffer a net loss. That’s happened before, including to me (eg, 2000-2010) and everyone here who has been investing long enough. It will almost certainly happen again.

But…so what of it?

If it’s an intolerable thought, don’t own stocks (or at least, don’t own much too much, which is generally good advice for everyone). It’s certainly not an argument for active portfolio management.

ETA: What is your personal investing question? It seems like you’re more interested in debating theory and hypotheticals — which are more appropriate for another sub forum.

My question is: For a new investor, who looks at the data available to find good long term investments. Would it not be prudent to pick investments that have done well than most over a period longer than most without regards to who came up with what philosophy and how famous that person was?

[White Coat Investor]

I have been sifting through mutual fund data on and off for the past few months through Fidelity and Schwab which give access to data of close to 10,000 mutual funds. I have tried to compare the best performing funds for the longest time scales (> 40 years) to popular index funds, that have low turnover ratios, no front/back loads or transaction fees (with the right broker ). I would like to share what I have learnt and hope to get some feedback and learn some more.

For large cap stocks, there are funds that have beaten S&P500 consistently for over 40-50 years. Fidelity's Contrafund has beaten the market since inception in the 60s. Fidelity growth company and blue chip growth since the 80s. American century's large cap funds (TWCIX, TWCGX, TWCUX) since 70s. I have been informed that the S&P500 can reliably be tracked to the 1950s (even though the market can be tracked to the start of the century with some reliability), which means that some of these finds have beaten it for most of its life. In any case these funds have beaten the available S&P500 mutual funds for their entire life. Of course, they have not beaten the Russell 1000 growth index which, one can argue, is the more suitable benchmark as it targets more growth oriented stocks. But unless one is wiling to put their entire large cap portfolio into a Russell 1000 index fund, these funds have done better. I am not considering sector specific funds for this discussion but broad market funds.

Some large cap funds that have handsomely beaten the S&P500 for > 50 years, have not done well in the last 10-15 years. For new investors, their average return since inception is misleading. Two great examples of this are the popular Fidelity Magellan Fund and the Sequoia Fund. Magellan fund has beaten S&P500 by 5% annually over its life, but has mostly followed the S&P500 lately. Sequoia has done much worse lately, underperforming by around 5% in the last 10 years. This is not the case with the funds I have mentioned. they have outperformed both in the short term and since inception.

For mid and small cap stocks, situation is more complicated to get a clear answer. I can't find index funds in the small and mid cap range that go beyond the late 1990s. Comparing a funds NAV to an index is not the same as comparing to an index fund since we need to account for expenses, reinvestment of distributions etc. Please let me know if there are small and mid cap index funds older than 30 years. Even with indices some have done better than others (SP600 small cap, Russell 2000, CSRP small cap etc). One can find quite a lot of funds that beat the corresponding indices by several percent for the past 10-15 years. In fact the small cap funds have beaten the index funds (VIMAX, VMCIX, VSMAX, SWSSX, FSDMX) by much wider margin than the large cap funds have with S&P500 but it is not clear if they had done that earlier than 2000 due to this issue. Some of these funds like (RPMGX, GTSGX, WGROX, CSMVX) have been operating for 30 years and longer and have beaten the small and Mid cap index in the last 10 years by 2-5% margins.

Some thoughts after looking at this data. For analysis in the short term (10-15 years), it seems that the small cap stock funds tend to outperform the relevant index with wider margins. The margins reduce with large cap funds. This makes some logical sense since small cap indices have thousands of stocks unlike SP500, and would take in a lot of garbage companies that tend to be more prevalent in the small cap than large cap. For the large cap, the growth oriented indices are not beatable like the Russell 1000 growth. Since large cap stocks form majority of a stock part of a portfolio, this would imply that most of the investment would be in index funds. But the index would have to be better than the S&P500 like the Russell 1000. If majority of a portfolio's large cap stocks are in S&P500 index, then the actively managed funds I mentioned at the beginning will have beaten it.

Let's assume a typical investment timeline for retirement of about 35 years (age 30-65). If I was retiring now and cashing out my accounts invested in S&P500 or total market index funds that perform about the same, for 35 years, I would be kicking myself for not investing with Fidelity's or American century's funds. For some of these over a 35 year time, the different in account balance would be over 2x.

The question is, is a 55 year track record of outperformance enough to choose an actively managed fund over an index fund, noting that even the oldest index funds are younger than this? One could keep waiting for reversion to mean which has not arrived for half a century. Please let me know your thoughts on these investments and how to tackle this question.

You mean does past performance indicate future performance after a certain number of years? I don't think so. See Warren Buffett, Peter Lynch etc for details.

By the way, the relevant index for small cap funds is a small cap index.

It's easy to find funds that have outperformed in the past. The trick is finding the ones that will outperform in the future. This task is so hard that it probably isn't worth doing, at least for publicly traded stocks.

[ottoman_javier]

You mean does past performance indicate future performance after a certain number of years? I don't think so. See Warren Buffett, Peter Lynch etc for details.

By the way, the relevant index for small cap funds is a small cap index.

It's easy to find funds that have outperformed in the past. The trick is finding the ones that will outperform in the future. This task is so hard that it probably isn't worth doing, at least for publicly traded stocks.

i suppose that is part of my question. What I am really trying to say is that from a neutral perspective, where you have no preconceived notions in any investment philosophy, you should treat the SP500 as an investment product like any other, and should analyze its performance against other funds, for the longest possible history. All investments are a bet on future performance and index funds are a bet as well. It is just that the bet is on the american economy and not a smaller selection of stocks within the economy, so it appears safer and it is. But this reliance on the index is only due to what it has done in the past. I think it is inconsistent to believe in an index fund philosophy while ignoring the past history of investments as the success of the philosophy is determined only by how it performs in the historical data available. hypothetically, if the bogolheads philosophy did not do well compared to other investments, none of us would be having this discussion. It has done well for a very long time and thus can be trusted to do well. If that is not the source of the trust then what is it? Is it then a trust in the individual who came up with it. That would be quite an anti-scientific idea. The index fund philosophy has not done well for Japanese market. it is not a universally good idea. It is just that the US market has always grown in the long term.

You mentioned Warren buffet. i heard him argue for index funds based on the historical growth of the american economy. That is a claim based on historical performance. Why must we then sop here and not test other funds for their historical performance?

[Doctor Rhythm]

My question is: For a new investor, who looks at the data available to find good long term investments. Would it not be prudent to pick investments that have done well than most over a period longer than most without regards to who came up with what philosophy and how famous that person was?

My answer is that for almost anyone (new or experienced) who wants to take on the risk to gain the potential reward of owning stocks, index funds are the preferred security. This has nothing to do with a philosophy or a philosopher; it’s just empiricism and math.

[andypanda]

"If a 50 year history is total nonsense,"

Well, not total. Just remember that a fund that is hugely successful may attract hordes of new investors year after year. As the money continues to pour in it becomes that much more difficult to manage and the results may suffer. Where do you put all of that money? What do you do, buy a small country?

Sure, Peter Lynch did very well between '77 and '90, but sometime in the late '90s Fidelity Magellan stopped taking new investors for the next ten years.

from Wikipedia - "By the end of the 20th century the Magellan Fund had well over $100 billion in assets under management. For quite some time it was the single largest mutual fund in the world until April 2000, when it was displaced by Vanguard's S&P 500 index fund."

fwiw, "In 1989, Magellan held an unheard-of 1,400 stocks."

[Call_Me_Op]

Even if there are a few mutual funds that have beat index funds over a long time period, that could be due to luck and does not necessarily say anything about how those funds will do going forward. In fact, a monkey throwing darts should beat an index fund in quite a few years if the monkey's stocks are in a Roth, have no transaction fees, and the monkey does not charge expenses. Or the monkey could create a "monkey index" in year 1 and just hold those stocks over time.

Also, do not use Buffet or Lynch as examples because they played in a very different, much less efficient market when they outperformed.

[Svensk Anga]

What good is a 40-50 year performance record? The manager responsible for most of it is either retired or dead. I have a very hard time believing that any institution can maintain such superiority over decades.

Disclaimer: I was an investor in the Harbor International fund (HAINX) for a good bit of time when it substantially outperformed the developed international index. The manager responsible for the stellar record (Hakan Castegren) has since died. Last I looked, its performance since has been uninspired. I think the real reason it outperformed was that Mr. Castegren was a European and suffered from home-region bias. He thus did not invest much in Japan and avoided its spectacular crash. The crash was included in the developed international indexes so Harbor International looked great by comparison. Any active fund out-performance likely includes a similar lucky call or two. Can the luckiness be repeated in the future?

[Kenkat]

Index funds are really nothing special except they are good at one thing - low expenses and low turnover.

As it turns out, that’s a really, really important thing to be good at because it explains pretty much all of the performance advantages index funds have over active funds. Why haven’t active funds adopted this really, really important thing? A few have, notably Vanguard active funds as well as a handful of funds from other companies. But mostly, it seems you can make a lot of money offering active advice. Hope spring eternal and everyone is looking to make an extra buck.

So if you want to find funds that have a fair chance at beating an index fund, filter first by low expenses and low turnover. You can probably stop there; I haven’t seen any evidence that any other factors really matter much.

[Chuckles960]

This is total nonsense.

If a 50 year history is total nonsense, it is unreasonable to invest in any SP500 index fund sine the history on that is shorter. I could be wrong but I thought the basis of index fund philosophy is that most active portfolio will average towards it in the long run since no one can pick winners all the time. So why bother with higher fee and trust in a manger for no reason. Is that not so? if it is so, then this is a statement based on historical data. If you want to ignore data, why believe in the index fund philosophy?

The idea that an index fund will perform better/worse/whatever is nonsense also. No one can predict the future, period. Somehow this simple fact is not getting through to you.

The rational reasons to invest in index funds are (a) to save on fees and postpone/invest capital gains taxes (b) to simplify one's life (c) to gamble to some degree but not too much, noting that unlike casinos, the odds generally favor you (d) to invest in an average rather than think that one can predict the future via data analysis.

PS As mentioned above I have money in FBGRX; but it is not because I think I can predict the future. I am just gambling with money I can afford to risk.

[ottoman_javier]

Index funds are really nothing special except they are good at one thing - low expenses and low turnover.

As it turns out, that’s a really, really important thing to be good at because it explains pretty much all of the performance advantages index funds have over active funds. Why haven’t active funds adopted this really, really important thing? A few have, notably Vanguard active funds as well as a handful of funds from other companies. But mostly, it seems you can make a lot of money offering active advice. Hope spring eternal and everyone is looking to make an extra buck.

So if you want to find funds that have a fair chance at beating an index fund, filter first by low expenses and low turnover. You can probably stop there; I haven’t seen any evidence that any other factors really matter much.

So the funds I mentioned have been filtered for low turnover. Your concern can be accounted for by comparing expense adjusted return rate post tax on dividend yields and sales of shares, and comparing it to the index funds. The funds still come on top. By this reasoning, would you be more willing to invest in these active funds if they were in a tax-advantaged account like a Roth where a high turnover will not affect gains?

[ottoman_javier]

Even if there are a few mutual funds that have beat index funds over a long time period, that could be due to luck and does not necessarily say anything about how those funds will do going forward. In fact, a monkey throwing darts should beat an index fund in quite a few years if the monkey's stocks are in a Roth, have no transaction fees, and the monkey does not charge expenses. Or the monkey could create a "monkey index" in year 1 and just hold those stocks over time.

Also, do not use Buffet or Lynch as examples because they played in a very different, much less efficient market when they outperformed.

no one is lucky for 55 years

[ottoman_javier]

This is total nonsense.

If a 50 year history is total nonsense, it is unreasonable to invest in any SP500 index fund sine the history on that is shorter. I could be wrong but I thought the basis of index fund philosophy is that most active portfolio will average towards it in the long run since no one can pick winners all the time. So why bother with higher fee and trust in a manger for no reason. Is that not so? if it is so, then this is a statement based on historical data. If you want to ignore data, why believe in the index fund philosophy?

The idea that an index fund will perform better/worse/whatever is nonsense also. No one can predict the future, period. Somehow this simple fact is not getting through to you.

The rational reasons to invest in index funds are (a) to save on fees and postpone/invest capital gains taxes (b) to simplify one's life (c) to gamble to some degree but not too much, noting that unlike casinos, the odds generally favor you (d) to invest in an average rather than think that one can predict the future via data analysis.

PS As mentioned above I have money in FBGRX; but it is not because I think I can predict the future. I am just gambling with money I can afford to risk.

Perhaps we should go past the trivially agreeable statements like no one can predict the future in order to move the discussion. I think we finally agree on one thing, that index fund is also a gamble. It is just that the bet is on the entire US economy so it is safer than a bet on a smaller subset of stocks within it. It is safety in numbers philosophy. However, think a level deeper than this. There is an assumption behind safety in numbers philosophy. The assumption is that the economy will grow as it has for 250 odd years. Perhaps you should get through your head that this is also a prediction of future based on past performance. Any act of investing is a tacit bet that your prediction of future will come true. You can choose to ignore that but it is still there.

[ottoman_javier]

But data analysis filters out most of the junk. A 50 year history comes in handy here and skews the odds in your favor.

That is data mining and survivor bias. It is easy to pick winners after the fact. "Making predictions is hard, especially about the future" attributed to Niels Bohr and Yogi Berra (and others).

Since you are new here, remember this is the Bogleheads forum, which is "Investing Advice Inspired by Jack Bogle". Bogle long ago debunked your thesis.

This is a very good point. Survivor bias will come in play when filtering high performing funds. I think running a historical study of how the best performance picks based on long term data would have fared in the subsequent decades and running that analysis decade over decade. At least that would give some useful information compared to the mostly useless studies that show that 90% of mutual funds underperform indices which is only true if one was picking funds blindly at random and would get 90% losers. I don't know if there has been a study like this.

[Kenkat]

Index funds are really nothing special except they are good at one thing - low expenses and low turnover.

As it turns out, that’s a really, really important thing to be good at because it explains pretty much all of the performance advantages index funds have over active funds. Why haven’t active funds adopted this really, really important thing? A few have, notably Vanguard active funds as well as a handful of funds from other companies. But mostly, it seems you can make a lot of money offering active advice. Hope spring eternal and everyone is looking to make an extra buck.

So if you want to find funds that have a fair chance at beating an index fund, filter first by low expenses and low turnover. You can probably stop there; I haven’t seen any evidence that any other factors really matter much.

So the funds I mentioned have been filtered for low turnover. Your concern can be accounted for by comparing expense adjusted return rate post tax on dividend yields and sales of shares, and comparing it to the index funds. The funds still come on top. By this reasoning, would you be more willing to invest in these active funds if they were in a tax-advantaged account like a Roth where a high turnover will not affect gains?

My concern with high turnover is that high turnover = higher expense which = lower returns.

I hold some active equity funds but would definitely advocate for holding them in tax deferred accounts due to higher capital gains distributions, yes.

[unwitting_gulag]

OP, I have a testable factual question for you, if I may. You mentioned Fidelity Contrafund as handsomely outperforming the S&P 500. Another poster on another financial forum noted the same thing. I checked on Yahoo Finance and other market-analytics/history web sites, and did not reach the same conclusion; instead I found that Contrafund underperforms.

So instead of debating philosophy - a good subject, and one to which hopefully we can return - I am asking for you to please post an apples-to-apples comparison, going back over 50 years (if possible), showing Contrafund vs. S&P 500... in both cases, with dividends reinvested.

[Mr. Buzzkill]

Performance of individual funds, indexed or not, is not as important as the overall portfolio performance.

Hats off to anyone who can afford to stomach a portfolio of 100 percent of a fund that endures huge drawdowns.

In my opinion the average investor should consider rebalancing a portfolio at an acceptable asset allocation ratio with at least a short term, intermediate term or total bond market fund. Which is no guarantee of smaller drawdowns but improves the odds.

[tibbitts]

OP, I have a testable factual question for you, if I may. You mentioned Fidelity Contrafund as handsomely outperforming the S&P 500. Another poster on another financial forum noted the same thing. I checked on Yahoo Finance and other market-analytics/history web sites, and did not reach the same conclusion; instead I found that Contrafund underperforms.

So instead of debating philosophy - a good subject, and one to which hopefully we can return - I am asking for you to please post an apples-to-apples comparison, going back over 50 years (if possible), showing Contrafund vs. S&P 500... in both cases, with dividends reinvested.

Instead of just saying "Contrafund underperforms", you have to provide some methodology you used to reach that conclusion.

Nobody is doing comparisons without dividends and cap gains reinvested, and nobody is talking about using active funds in taxable accounts.

[Northern Flicker]

I would only look at the time period of the current fund manager. That probably still looks good for the Contrafund, but the Contrafund in the 1960's is not particularly relevant to the Contrafund moving forward because it is not an asset class. It is a sequence of portfolios.

With a market index fund, you are virtually guaranteed a market return, whatever that turns out to be. With an active fund, lagging the performance of the market is a definite possibility, as about 2/3 of active managers lag the market net of fees. Some investors prefer the guarantee of a market return. Using a fund like the Contrafund as an implementation of an allocation to large cap US stocks or US stocks in general in your asset allocation is not a bad decision as long as you understand that it could trail the market in the future. It is a large cap growth fund and will underperform when growth underperforms.

An interesting 60/40 balanced portfolio:

50% Wellington
30% Contrafund
20% intermediate treasuries

https://www.portfoliovisualizer.com/bac ... 9MmZ42ipD1

[nisiprius]

...I could be wrong but I thought the basis of index fund philosophy is that most active portfolio will average towards it in the long run since no one can pick winners all the time. So why bother with higher fee and trust in a manger for no reason. Is that not so? if it is so, then this is a statement based on historical data. If you want to ignore data, why believe in the index fund philosophy?

Well, you are wrong. That isn't the basis of the index fund philosophy. For my purpose I am going to treat the S&P 500 as equivalent to "the total market," because that is what it was originally designed to do and because it is still a good approximation to the total market. In this forum, we more often suggest the Vanguard Total Stock Market Index Fund because it is a better approximation. In any case, we are talking about trying to mirror the total market.

Argument #1 was made by William Sharpe in The Arithmetic of Active Management and by John C. Bogle in his "cost matters hypothesis." Since total market indexers mirror the total market, if you remove them from the market, you are left with all active investors, and--by "arithmetic," or perhaps high-school algebra, or perhaps Euclid-style verbal logic, collectively their investment holdings percentages must also match the total market. Therefore the collective returns of all active managers must equal market returns minus costs.

And since active management costs more than passive indexing, active managers will collectively have lower returns after costs. This is borne out by the SPIVA reports on active management. However, it has been weakened of late because costs of all funds have fallen, and the cost difference between the lowest-cost active fund and index funds has narrowed.

Argument #2 is from financial economics theory about the properties of "the market portfolio." The market portfolio is the sum of all assets held by investors in a market. It is special, in just the same way that the vertical direction measured by a plumb line is special. You may argue that for some purposes the Leaning Tower of Pisa is better than a plumb line, but it is not reasonable to say that it is "more vertical." "Vertical" isn't arbitrary. The result from financial economics has been described by Jeremy Siegel in Stocks for the Long Run:

It can be shown that maximum diversification is achieved by holding each stock in proportion to its value to the entire market... ...capitalization-weighted indexes have some very good properties. First... these indexes represent the average dollar-weighted performance of all investors, so that for anyone who does better than the index, someone else must be doing worse. Furthermore, these portfolios, under the assumption of an efficient market, give investors the "best" tradeoff between risk and return. THis means that for any given risk level, these capitalization-weighted portfolios give the highest returns; and for any given return, these portfolios give the lowest risk. This property is called mean-variance efficiency.

(He uses this to lead into a claim that markets are not efficient and that that "fundamental weighting" is better).

This is the argument that was made by "quants" like John MacQuown, who developed the academic arguments behind indexing in the 1970s. John C. Bogle always insisted that he didn't know about that work and that it wasn't the the foundation of the index fund. Be that as it may, that's the academic basis for indexing.

Neither of them is based on blindly looking at past performance of various investments on an ad hoc, empirical basis.

[MathWizard]

Suppose a friend told you that certain fund had beaten the S&P 500 in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, and 2005. Fifteen years, literally every year, perfect consistency, no exceptions. And told you that the manager who achieved that was still running the fund, had won numerous industry awards, and had even had a book written about him. And your friend said he was going invest heavily in it, because "even if he doesn't manage to beat the S&P 500 next year, I think my money will be safe there."

What would you say to that friend?

Madoff ?

[Northern Flicker]

Suppose a friend told you that certain fund had beaten the S&P 500 in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, and 2005. Fifteen years, literally every year, perfect consistency, no exceptions. And told you that the manager who achieved that was still running the fund, had won numerous industry awards, and had even had a book written about him. And your friend said he was going invest heavily in it, because "even if he doesn't manage to beat the S&P 500 next year, I think my money will be safe there."

What would you say to that friend?

Madoff ?

Legg Mason. 2006 was the end of Bill Miller's 15-year streak of beating the market.

[Call_Me_Op]

Even if there are a few mutual funds that have beat index funds over a long time period, that could be due to luck and does not necessarily say anything about how those funds will do going forward. In fact, a monkey throwing darts should beat an index fund in quite a few years if the monkey's stocks are in a Roth, have no transaction fees, and the monkey does not charge expenses. Or the monkey could create a "monkey index" in year 1 and just hold those stocks over time.

Also, do not use Buffet or Lynch as examples because they played in a very different, much less efficient market when they outperformed.

no one is lucky for 55 years

If you are talking about Buffet, he made his money by buying businesses and helping run them - not by stock picking. Buffet certainly is highly unusual - but good luck picking the next Buffet. I'll be remaining in index funds.

[steve roy]

Even if there are a few mutual funds that have beat index funds over a long time period, that could be due to luck and does not necessarily say anything about how those funds will do going forward. In fact, a monkey throwing darts should beat an index fund in quite a few years if the monkey's stocks are in a Roth, have no transaction fees, and the monkey does not charge expenses. Or the monkey could create a "monkey index" in year 1 and just hold those stocks over time.

Also, do not use Buffet or Lynch as examples because they played in a very different, much less efficient market when they outperformed.

no one is lucky for 55 years

If you are talking about Buffet, he made his money by buying businesses and helping run them - not by stock picking. Buffet certainly is highly unusual - but good luck picking the next Buffet. I'll be remaining in index funds.

Pre. Cisely. A dynamite manager might make the difference for awhile, but an active fund manager doesn’t live forever. (See “Munger, Charles” for a recent example of the Not Living Forever thing).

Therefore, once the dynamite manager has moved on, it’s a roll of the dice if the next one is as good. Index funds are the safer bet.

[ottoman_javier]

OP, I have a testable factual question for you, if I may. You mentioned Fidelity Contrafund as handsomely outperforming the S&P 500. Another poster on another financial forum noted the same thing. I checked on Yahoo Finance and other market-analytics/history web sites, and did not reach the same conclusion; instead I found that Contrafund underperforms.

So instead of debating philosophy - a good subject, and one to which hopefully we can return - I am asking for you to please post an apples-to-apples comparison, going back over 50 years (if possible), showing Contrafund vs. S&P 500... in both cases, with dividends reinvested.

The best place to look for this is the fund's own prospectus on fidelity which reports AAR of 12.43 since inception in 1967, which, unless they are lying, is 2.43% above the roughly 10% average SP500 with reinvested dividends.
https://fundresearch.fidelity.com/mutua ... /316071109

Though they oddly don't do comparisons for longer than 10 years, which smells fishy. I tried it on morningstar and got a growth with dividends of 31,134% for contrafund vs 14,073% for VFIAX starting from 12/1976 till now. I don't know how to attach an image here for the comparison but it is in the link. The current share class of VFIAX only dates back to 2000, but the fund started in 1976 under a different name. I think morningstar combined the data. Using that data from 11/2000 till now VFIAX gives 485% vs contrafunds' 703% growth with dividends on morningstar

https://www.morningstar.com/funds/xnas/fcntx/chart

[Johm221122]

OP, I have a testable factual question for you, if I may. You mentioned Fidelity Contrafund as handsomely outperforming the S&P 500. Another poster on another financial forum noted the same thing. I checked on Yahoo Finance and other market-analytics/history web sites, and did not reach the same conclusion; instead I found that Contrafund underperforms.

So instead of debating philosophy - a good subject, and one to which hopefully we can return - I am asking for you to please post an apples-to-apples comparison, going back over 50 years (if possible), showing Contrafund vs. S&P 500... in both cases, with dividends reinvested.

The best place to look for this is the fund's own prospectus on fidelity which reports AAR of 12.43 since inception in 1967, which, unless they are lying, is 2.43% above the roughly 10% average SP500 with reinvested dividends.
https://fundresearch.fidelity.com/mutua ... /316071109

Though they oddly don't do comparisons for longer than 10 years, which smells fishy. I tried it on morningstar and got a growth with dividends of 31,134% for contrafund vs 14,073% for VFIAX starting from 12/1976 till now. I don't know how to attach an image here for the comparison but it is in the link. The current share class of VFIAX only dates back to 2000, but the fund started in 1976 under a different name. I think morningstar combined the data. Using that data from 11/2000 till now VFIAX gives 485% vs contrafunds' 703% growth with dividends on morningstar

https://www.morningstar.com/funds/xnas/fcntx/chart

Your not using the actual return of the S&P 500 during the time period but

above the roughly 10% average SP500 with reinvested dividends.

[ottoman_javier]

...I could be wrong but I thought the basis of index fund philosophy is that most active portfolio will average towards it in the long run since no one can pick winners all the time. So why bother with higher fee and trust in a manger for no reason. Is that not so? if it is so, then this is a statement based on historical data. If you want to ignore data, why believe in the index fund philosophy?

Well, you are wrong. That isn't the basis of the index fund philosophy. For my purpose I am going to treat the S&P 500 as equivalent to "the total market," because that is what it was originally designed to do and because it is still a good approximation to the total market. In this forum, we more often suggest the Vanguard Total Stock Market Index Fund because it is a better approximation. In any case, we are talking about trying to mirror the total market.

Argument #1 was made by William Sharpe in The Arithmetic of Active Management and by John C. Bogle in his "cost matters hypothesis." Since total market indexers mirror the total market, if you remove them from the market, you are left with all active investors, and--by "arithmetic," or perhaps high-school algebra, or perhaps Euclid-style verbal logic, collectively their investment holdings percentages must also match the total market. Therefore the collective returns of all active managers must equal market returns minus costs.

And since active management costs more than passive indexing, active managers will collectively have lower returns after costs. This is borne out by the SPIVA reports on active management. However, it has been weakened of late because costs of all funds have fallen, and the cost difference between the lowest-cost active fund and index funds has narrowed.

Argument #2 is from financial economics theory about the properties of "the market portfolio." The market portfolio is the sum of all assets held by investors in a market. It is special, in just the same way that the vertical direction measured by a plumb line is special. You may argue that for some purposes the Leaning Tower of Pisa is better than a plumb line, but it is not reasonable to say that it is "more vertical." "Vertical" isn't arbitrary. The result from financial economics has been described by Jeremy Siegel in Stocks for the Long Run:

It can be shown that maximum diversification is achieved by holding each stock in proportion to its value to the entire market... ...capitalization-weighted indexes have some very good properties. First... these indexes represent the average dollar-weighted performance of all investors, so that for anyone who does better than the index, someone else must be doing worse. Furthermore, these portfolios, under the assumption of an efficient market, give investors the "best" tradeoff between risk and return. THis means that for any given risk level, these capitalization-weighted portfolios give the highest returns; and for any given return, these portfolios give the lowest risk. This property is called mean-variance efficiency.

(He uses this to lead into a claim that markets are not efficient and that that "fundamental weighting" is better).

This is the argument that was made by "quants" like John MacQuown, who developed the academic arguments behind indexing in the 1970s. John C. Bogle always insisted that he didn't know about that work and that it wasn't the the foundation of the index fund. Be that as it may, that's the academic basis for indexing.

Neither of them is based on blindly looking at past performance of various investments on an ad hoc, empirical basis.

You just said the same thing I did about inability to pick winners all the time and averaging to the mean market returns, but with a lot more space. Verbiage does not equal argument, but thank you. I understand the index fund philosophy

[1moreyr]

I went to index funds because i lost my mind reviewing managed funds, their history of performance, their expense ratios. the manager of the fund, how long they had been there, did i think they would continue... blah blah

I found index funds freeing as i just had to accept beating 75% of the funds (on average).

That being said, I have owned two funds on your list from 1990 and still do. I don't however invest more in them and have them out of pure inertia. (TWCUX, TWCGX).. I am still happy with them but i think it was dumb luck that i chose them.

[ottoman_javier]

OP, I have a testable factual question for you, if I may. You mentioned Fidelity Contrafund as handsomely outperforming the S&P 500. Another poster on another financial forum noted the same thing. I checked on Yahoo Finance and other market-analytics/history web sites, and did not reach the same conclusion; instead I found that Contrafund underperforms.

So instead of debating philosophy - a good subject, and one to which hopefully we can return - I am asking for you to please post an apples-to-apples comparison, going back over 50 years (if possible), showing Contrafund vs. S&P 500... in both cases, with dividends reinvested.

The best place to look for this is the fund's own prospectus on fidelity which reports AAR of 12.43 since inception in 1967, which, unless they are lying, is 2.43% above the roughly 10% average SP500 with reinvested dividends.
https://fundresearch.fidelity.com/mutua ... /316071109

Though they oddly don't do comparisons for longer than 10 years, which smells fishy. I tried it on morningstar and got a growth with dividends of 31,134% for contrafund vs 14,073% for VFIAX starting from 12/1976 till now. I don't know how to attach an image here for the comparison but it is in the link. The current share class of VFIAX only dates back to 2000, but the fund started in 1976 under a different name. I think morningstar combined the data. Using that data from 11/2000 till now VFIAX gives 485% vs contrafunds' 703% growth with dividends on morningstar

https://www.morningstar.com/funds/xnas/fcntx/chart

Your not using the actual return of the S&P 500 during the time period but

above the roughly 10% average SP500 with reinvested dividends.

I already gave you the exact numbers from morningstar for Contrafund and VFIAX for the time period. They are not rough but exact returns, check on mornigstar's char comparisons. You can not invest in an index (its just a formula), you invest in an index fund which is not the same. It has friction and imperfections. So VFIAX is the oldest SP500 index fund I can find.

[Northern Flicker]

Using the investor shares VFINX will get you back to 1976:

https://www.portfoliovisualizer.com/bac ... XF0KnbKvqU