Investing With American Funds Is Like Betting On Tiger Woods

Tiger Woods was awesome. Before his 33^rd birthday he had won 14 major golf championships. Jack Nicklaus held the record at 18 majors. Woods was closing fast. But then something happened. Tiger Woods stumbled. He’s now trying to recover but his rivals are tough. It might be hard to believe, but 779 players are currently ranked ahead of him. Legendary golfer Johnny Miller says, “It’s crowded at the top.” In the past, he says, it was easier for great players to stand out.

That goes for most sports–and for actively managed mutual funds. In the past, it was easier for a good fund manager to beat the market. If a manager knew that small stocks, value stocks and high quality stocks with momentum often beat the index, that fund could win. These are called factor-based premiums. They’re like refined golf swings. But the days of applying them and whipping people have gone the way of wooden clubs. They’re no longer winning weapons.

In The Arithmetic of Active Management, Economic Nobel Prize Winner William F. Sharpe says the average actively managed stock market dollar will earn the market’s return. Here’s what that means. If the stock market gains 8 percent, including dividends, the typical actively managed stock market dollar would have earned about 8 percent, before fees. To gain an edge, an active fund manager must beat his or her peers. But like Tiger Woods’ competition, those peers keep getting better. The only way to guarantee that you’ll beat most of the pros is with a low-cost index fund.

American Funds is a fabulous actively managed fund company. But they want you to invest based on what they used to do. That’s like betting money on Tiger Woods today.

The firm’s website displays a championship-winning chart. Five of its actively managed funds trounced the S&P 500 between 1976 and 2016. It says, “So the next time you hear ‘You can’t beat the index’ consider American Funds long-term track record.”

Look closely at that chart. It appears that their funds are pulling further and further ahead of the stock market index. But let’s draw back the curtain. Recent scores aren’t as strong as that colorful graphic claim.