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Costs matter. Whether buying a car or selecting an investment strategy, costs are likely to be an important factor. When you buy a car, for example, the sticker price tells you approximately how much you can expect to pay. But the sticker price is only one part of the overall cost of owning a car. Sales taxes, insurance, routine maintenance costs, and the potential cost of unexpected repairs are also important. When investing in mutual funds, less familiar investment costs need to be considered for evaluating the overall cost effectiveness of a strategy.

Investors should be aware of the poor collective performance of U.S.-based mutual fund managers actively picking stocks and bonds. This conclusion is clear in the latest Dimensional Fund Advisors’ Mutual Fund Landscape report. It features a graphical view of the number and performance of stock and bond funds at 5, 10, and 15 year intervals. The track record is poor.

Key points include:

  • Less than half of the stock funds survived over 15 years. The rest have merged or closed. Poor performance is often the culprit.
  • Fewer than 1 in 5 stock funds outperformed their benchmarks over 15 years.

You, the Stock Market, and Your Election Fears

presidential-party-24-hour-usePresidential party affiliation does not matter when it comes to the stock market.

Presidential party affiliation does not matter when it comes to long-term stock market performance.

This perhaps provocative notion was advanced in the Dimensional Funds Advisors article below. They wrote, “….over the long run, the market has provided substantial returns regardless of who controlled the executive branch.” Part of Dimensional’s proof is a graph showing the growth a dollar invested in the S&P 500 index since 1926. Investment growth under Democrats is highlighted in blue and Republicans in red. Some may argue that performance is better under Democrats. We know that performance under a couple of Republican Presidents was poor. But under Democrat Presidents, better performance coincided with periods of more volatility or risk. Investors expect greater rewards for greater risk, so better performance should be expected. This is what the Federal Reserve Board staff working paper, “Alternative Estimates of the Presidential Premium,” found. After adjusting for risk, the authors concluded: “the apparent discrepancy between the stock market performance of Democrats and Republicans is largely reduced.”

You know regret if you have ever sold a fund or stock only to see it rise shortly afterwards. Worse yet is when the fund or stock you purchased to replace the one sold underperforms. Some index funds systematically duplicate these regretful transactions through what is called “Index reconstitution.”  As you might suspect, such transactions drag performance down. The widely-tracked Russell index series reconstitutes every June. This year it is Friday June 24, 2016.

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