" Statisticians will tell you that you need 20 years worth of data -- that's right, two full decades -- to draw statistically meaningful conclusions. Anything less, they say, and you have little to hang your hat on. But here's the problem for fund investors: After 20 successful years of managing a mutual fund, most managers are ready to retire. In fact, only 22 U.S. stock funds have had the same manager on board for at least two decades--and I wouldn't call all the managers in that bunch skilled. "

Susan Dziubinski, University editor with Morningstar.com

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The most common form of active management is stock picking. On average, stock pickers will always lose by the amount of their costs and expenses. Some will do better and some will do worse than an appropriate or blended benchmark of risk factors. Since the average return of the market is the average return of all investors, the average investor gets the average return. Although you may think that you can choose or be the investor who beats the others, the probability of a money manager outperforming other managers each year is equal to getting heads on the toss of a coin: 50/50. This is because the markets are random, just like the coin toss. The chances of a manager beating a market over the long term (more than 10 years) were 1 in 36 in one study, and 1 in 39 in another 30-year study! You would be better off betting on one number on the roulette table in Vegas, where odds are 1 in 38. So far, we have collected over 200 articles measuring the performance of active managers, starting with Alfred Cowles in 1933, and the results are not good for active management.

Stock pickers are active investors who bet they can beat a market by picking stocks they believe will outperform an index. To be precise, the only proper comparison to their result is the portfolio they choose. All other portfolios will end up with different risk and return characteristics. Generally, they are taking more risk than the index, because they are concentrating their bets on fewer stocks than those in the index. When they allocate their portfolio differently than the index, they are guaranteed to obtain a different return and risk level. Sometimes it is more and sometimes it is less, but we can always assume it will be different when looking at both risk and return. Since it takes at least 20 years of risk and return data to confirm skill over luck, stock pickers are faced with a virtually impossible task in assuring continued success against the appropriate market index. However, indexes are a source of 20-year risk and return data, and consequently are the only logical choice for establishing efficient portfolios of various levels of expected risks and returns.

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