Don’t Buy Winners

For almost five decades, the literature on the investment performance of mutual funds has found that very few managers possess sufficient stock-picking or market-timing talent to allow them to consistently and reliably produce positive risk-adjusted performance after considering their fees. In other words, there’s little to no evidence of outperformance beyond the randomly expected.

As my co-author Andrew Berkin and I discuss in our book, “The Incredible Shrinking Alpha,” while perhaps disheartening, this result shouldn’t be surprising given the very high skill level of active managers competing fiercely in a zero-sum game, even before expenses. Thus, investors shouldn’t expect there to be many opportunities for a free lunch.

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