Efficient Markets - Active Management - Looking for Needles in Haystacks
In this video, I explain how efficient markets work against active managers who are trying to beat the market through stock selection.
The market is very efficient at identifying close-to fair prices for stocks and bonds. For the active manager who is trying to pick the needles (outperforming stocks) from the haystack AND outperform by enough to beat his or her fees in the long run - the odds are stacked against them.
And it shows in the return data. Over 1, 3, and 5 year periods, the only a few actively managed equity funds exceed their benchmarks. As the time periods expand (10 years, 15 years, 20 years), the numbers become even smaller.
Despite the evidence that most investors would be better off in broad, low-cost, total market index funds - the vast majority of Canadians' retirement funds are managed using actively managed mutual funds.
There are a lot of reasons for this, and I will keep digging into these as the series continues. Thanks for watching!