Burt Malkiel: I wrote a book in 1973 suggesting that people buy index funds. There were no index funds then. The book is now — it’s called A Random Walk Down Wall Street — it’s in its 10th edition. Every four years or so, I do a new edition and I ask, Okay, index funds started three years after the book was first published, in the late 70s, and I ask whether index funds do better than the typical actively managed fund. And period after period, I find, that two-thirds of actively managed funds are outperformed by the index. And the one-third that win in one period aren’t the same as the people who win in the next period.
Now, in any particular period, yeah, there’s a third of them who outperform. And in the advertising, what they will do is they will have a particularly selected period, a particularly selected benchmark, and say, “Hey, we outperformed.” But what you should ask is, “Did they outperform in the future?” One of the things that I have in my book, which I think is just very revealing, and I just took this from something that was in The Wall Street Journal. The Wall Street Journal, at the end of the first decade of the 2000s, said 13 equity mutual funds beat their benchmarks, beat the indices, for 10 consistent years.
Now, they ran this the year after. They said, “10 consistent years up until last year.” How many of the 13 beat their benchmark in the last year? And the answer was 12 did worse, only one did better, and the one that did better then failed in the year after that. So sure, in any particular period, you’ll find people who beat the benchmarks and the mutual fund industry is a huge advertising, I mean, this is a marketing industry. It’s a marketing industry almost more than it is an investment industry. And sure, they will advertise, “Yes, we beat our benchmark in this carefully selected period, for this carefully selected time.”