One of the most common questions at the beginning of the financial planning process from prospects in El Paso and elsewhere is: what are your favorite stock picks? Our response is that stock picking or market timing doesn’t work, and we’re backed by decades of research. However, the hype and noise of Wall Street keep trying to persuade investors by pouring millions of dollars a year in advertising to showcase their “super star” managers and their latest “hot” stock picks.  

Here’s further evidence that supports our belief that active management doesn’t work.

Last week, Bloomberg Business Week (previously known as Business Week) published an article that showed how the managers of six of the ten largest U.S. stock mutual funds have moved this year almost completely in sync with the S&P 500 (in technical words, the funds have shown very high correlation with the S&P 500).

This is critical, because actively managed funds can cost up to 20 times as much as an index fund and they’re getting the same performance (before fees).

Let’s see the opinions of some of those fund managers (who are paid millions a year to outperform the market).

First, let’s see what Robert Doll said. Robert is Black Rock Inc’s Chief Equity Strategist:

      We were expecting 2010 to be the year when stock selection would add value, but that hasn’t been the case.”

Here’s what Duncan Richardson (Chief Equity Investment Officer for Eaton Vance Corp., another active management mutual fund company) said:

      The only thing that goes up in a crisis is correlation; it does make it very hard for stock pickers in an environment like this.”

Citing another active manager, the article closes with the hopeful phrase “Some active managers can add value.” There’s no doubt about it. Certainly, some active managers can add value every year (by beating the market); the problem is that those outperformers are different every year and the challenge is to identify them in advance.

Trying to beat the market is more a matter of hope and almost always a losing strategy. Achieving market returns is a matter of simple arithmetic. The winning strategy continues to be to build a low cost portfolio diversified among multiple asset classes and to apply disciplined principles of investing.