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Chart is intended for illustrative purposes only. Opinions expressed are not necessarily those of LPL Financial, Cornerstone Wealth Management, LLC or RP Zeigler Investment Services, Inc.

I came across this chart on Twitter today and, well, it immediately pissed me off. Why? I hate to speculate on someone’s motivations and/or agenda, but I’m going to do so right now. In all fairness I have no idea what the agenda was behind the release of this chart. Also, to be fair, whoever gathered the data and created this chart may have had nothing but good and innocent intentions. I, however, did not initially see it that way. Total shot in the dark here, but my theory is that this chart was created in order to reinforce the mindset that during stock market declines, active domestic equity management will outperform passive domestic equity management. Now, that’s a fine theory and all, but you may have glossed over 3 critical pieces of info. Critical to the debate that is currently raging in my industry: whether active management or passive management is a better strategy for investors. I’ve already dug my heels in on this one and you can read more about my stance in the About Me page on this blog if you’re so inclined. What are those 3 things? Here:

  1. The part in the title that you may have glossed over that says (BEFORE FEES). This is important people. I will give this chart some credit here in that they disclosed pretty simply and easily that all the data contained within the chart DO NOT take into account any fees whatsoever. Well done. No, seriously, I’m so glad that was disclosed. Fees are important when analyzing any investment. Every fee comes directly out of your invested dollars. Every fee drags on your overall return. Keep that in mind as you look at this chart. I’m glad it  reflects those facts and I want you to realize the impact fees have on your bottom line. In some scenarios reflected in this chart, I’d be willing to bet that if all fees and costs were taken into consideration, the results might be much different.
  2. At the very bottom of the graph, contained within the disclosures, there’s this little phrase that states: “Past performance is no guarantee of future results.” Folks, they’re not lying to you. They’re telling you the absolute truth! I don’t want to insult your intelligence by elaborating this that phrase because it’s pretty cut and dry. Let’s move on.
  3.  Here’s the real rub I had when I first saw this graph. Let’s just take all that info and assume it’s completely accurate and all factors have been taken into consideration, okay? Okay. It doesn’t change the fact that as of 2016, there were 9,511 mutual funds out there in the universe. Can you tell me which ones are going to beat their respective benchmarks during the next bear market? Hell, can you tell me when the next bear market is going to hit because I’d love to know. No, you can’t. Neither can I or anyone else.

See, I believe this chart was created to reinforce the belief some people ‘in the biz’ have that active domestic stock management is superior to passive domestic stock management. I don’t buy it. You, on the other hand, can do whatever you want (last time I checked this is a free country). If you like your actively managed funds, then by all means, keep them! Doesn’t make a lick of difference to me. By writing this article I hope to illustrate how I look at info-charts such as this one. I’m skeptical of just about everything these days and when I see pieces of research such as this one, I normally dig deeper to see what I can find.

Okay. That’s it. I’m done.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Investing in an index fund involves risk, including assuming the risks of the underlying securities, index tracking errors, and the loss of principle. 

Investing involves risk including loss of principle. No strategy assures success of protects against loss.

Investing in mutual funds involves risk, including possible loss of principle. Value will fluctuate with market conditions and may not achieve its investment objective. 

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Cornerstone Wealth Management LLC, a registered investment advisor. Cornerstone Wealth Management LLC and RP Zeigler Investment Services, Inc. are separate entities from LPL Financial. 

The LPL Financial Registered Representative associated with this site may only discuss and/or transact securities business with residents of the following states: Illinois, Indiana, Florida, Colorado, Michigan, North Carolina, Iowa and Texas.

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