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It's the elusive Holy Grail that makes investing so enticing, exciting and, unfortunately, disappointing.

The ugly side of professional portfolio management:

Most professional money managers are undoubtedly honest and wellf-meaning. Some of them are not so ethical, fooling others as well as themselves.

The vast majority of the public have the wool pulled over their eyes. This public is in the form of individual investors as well as institutional investors such as pension plans, foundations and endowment funds. The delusional game is that active management is the best and only way to go when it comes to investing. Active management holds out the allure that it can beat the market. This is often in the form of deceptive advertising, slick magazine headlines and smoke-and-mirror representations of track records and performances that have not been prosecuted enough by the SEC.

The perpetrators of this game are full-service brokers and portfolio managers, those who run trillions of dollars in mutual funds, hedge funds, those who manage endowment funds. Hedge funds, in particular, largely unregulated, belie their mystique with historical performances worse than US Treasury Bonds, and actual expenses and fees that often exceed 80 percent. The con game is in the form of management fees and commissions that are charged for the incompetence of under-performing the market. And for the pointless over-trading and over-charging (hard to prove illegal churning). Or pretending to run an actively managed fund that is in reality no more than an index fund, but charging for the supposed active management. These management fees and commissions would have been avoided had the gullible public bought and held their own index funds or insisted on sensible passive management from their advisors. The uninformed public would have outperformed their expert advisors, as one Harvard study has clearly shown.
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Here's the reality check:

Most investors, even the so-called professionals who run mutual funds and hedge funds, the hotshot stock pickers and newsletter gurus, fall short of the dream of beating the the stock market over the long run, not keeping up with the S&P 500 or any other measure of the broad markets. All the most proficient ones can do is make respectable but unspecacular returns that, at best, somewhat beat government-stated inflation (or keep up with "real inflation"), and, at worst, "preserve capital."

Below are some track records that tell the story.

Hedge funds: In 2012, the HFRX Global Hedge Fund Index returned 3.5 percent (compared to the S&P 500's 16 percent), and the Index returned just 1.7 percent over the past 10 years (compared to S&P 500's 8.35 percent). The hedge fund arena is so perilous that up to 10 percent of hedge funds fail and go out of business every year.

Mutual funds: On the whole, the average mutual fund returns two percent less per year than does the stock market in general. Approximately 80 percent of mutual funds underperform the stock market at any given time. A Harvard study found that individual investors did better than listening to their stock brokers.

The best so-called market timers are barely able to beat the market consistently, but not beyond single-digit annual gains. For instance, Bob Brinker’s Marketimer, a 2013 member of the Hulbert Financial Digest Honor Roll, has earned an average annual return 8.2 percent for the 15-year period through 2012. This compares to the stock market's overall gains of 11 percent annually during that time, if one were to buy and hold an index fund. (Here are more buy and hold historical market retunrs.)

For many investors with "realistic" expectations, 8.2 percent yearly gains are superb and not disappointing by any means. For those who are obsessed with getting rich quickly, finding the Holy Grail, it's another matter.

Ordinary, amateur investors, especially those who don't use the best qualified investment advisors, find it rough going on their own. Even investment clubs designed to provide guidance and support for investors, once thriving and numerous, are disbanding and dwindling in number, as they find that investing is a losing game.

The fact is, investors on their own would make more money than most funds by simply buying and holding an index ETF or mutual fund, rather than entrusting their money to a managed fund.  Continued...
The loser’s game of beating the market and the incompetence and con games of active management

We lie the loudest when we lie to ourselves.

Far more crucial than what we know or don't know is what we do not want to know.                                                                                                                           
--Eric Hoffer

Victory over the market

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