What Every Investor Should Know
10 ways to help improve your odds of success
1. Can professional fund managers predict which stocks will go up or down?
If fund managers could consistently identify winning or losing assets, you would expect their returns to show it. But they don’t.
Historically, only about one in five funds survives and outperforms over 20 years. That’s based on our research of 2,860 equity funds that existed in 2004. Two decades later, more than half of these funds had folded, often due to poor performance. And only 18% of equity funds were able to survive and outperform their benchmarks over this period. Your chances are even worse for fixed income funds, where only 15% survived and outperformed. Are those odds you’d bet your savings on?
US-Based Active Fund Performance, 2004–2023
Data Sample
The sample includes US-domiciled, USD-denominated open-end and exchange-traded funds (ETFs) in the following Morningstar categories. Non-Dimensional fund data provided by Morningstar. Dimensional fund data is provided by the fund accountant. Dimensional funds or subadvised funds whose access is or previously was limited to certain investors are excluded. Index funds, load-waived funds, and funds of funds are excluded from the industry sample.
Methodology
The beginning samples include funds as of the start of the 10-, 15-, and 20-year periods. Surviving funds are those with return observations for every month of the sample period. Each fund is evaluated relative to its primary prospectus benchmark. Where the full series of primary prospectus benchmark returns is unavailable, non-Dimensional funds are instead evaluated relative to their Morningstar category index. Outperformers are funds that survived the sample period and whose cumulative net return over the period exceeded that of their respective benchmark. We aggregate funds with multiple share classes to the strategy level.
Morningstar Categories (Equity)
Equity fund sample includes the following Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Global Real Estate, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Real Estate, Small Blend, Small Growth, Small Value, Global Large-Stock Blend, Global Large-Stock Growth, Global Large-Stock Value, and Global Small/Mid Stock.
Morningstar Categories (Fixed Income)
Fixed income fund sample includes the following Morningstar historical categories: Corporate Bond, High-Yield Bond, Inflation-Protected Bond, Intermediate Core Bond, Intermediate Core-Plus Bond, Intermediate Government, Long Government, Muni California Intermediate, Muni California Long, Muni Massachusetts, Muni Minnesota, Muni National Intermediate, Muni National Long, Muni National Short, Muni New Jersey, Muni New York Intermediate, Muni New York Long, Muni Ohio, Muni Pennsylvania, Muni Single State Intermediate, Muni Single State Long, Muni Single State Short, Muni Target Maturity, Short Government, Short-Term Bond, Ultrashort Bond, Global Bond, and Global Bond-USD Hedged.
Index Data Sources
Index data provided by Bloomberg, MSCI, Russell, FTSE Fixed Income LLC, and S&P Dow Jones Indices LLC. Bloomberg data provided by Bloomberg. MSCI data © MSCI 2024, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. FTSE fixed income indices © 2024 FTSE Fixed Income LLC. All rights reserved. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. US-domiciled mutual funds and US-domiciled ETFs are not generally available for distribution outside the US.
2. Why not just invest in the funds that have outperformed?
Some investors select funds based on past returns, but relatively few winners keep winning. Research shows that most funds ranked in the top-performing 25% based on five-year returns did not remain in the top 25% in the next five years. Only around one in five of the top-performing equity funds stayed on top, and only about a third in fixed income did.
In other words, past performance offers little insight into a fund’s future returns.
US-Based Percentage of Top-Ranked Funds that Stayed on Top
Data Sample
The sample includes US-domiciled, USD-denominated open-end and exchange-traded funds (ETFs) in the following Morningstar categories. Non-Dimensional fund data provided by Morningstar. Dimensional fund data is provided by the fund accountant. Dimensional funds or subadvised funds whose access is or previously was limited to certain investors are excluded. Index funds, load-waived funds, and funds of funds are excluded from the industry sample.
Methodology
This study evaluated fund performance over rolling periods from 2004 through 2023. Each year, funds are sorted within their category based on their previous five-year total return. Those ranked in the top quartile of returns are evaluated over the following five-year period. The chart shows the average percentage of top-ranked equity and fixed income funds that kept their top ranking in the subsequent period.
Morningstar Categories (Equity)
Equity fund sample includes the following Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Global Real Estate, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Real Estate, Small Blend, Small Growth, Small Value, Global Large-Stock Blend, Global Large-Stock Growth, Global Large-Stock Value, and Global Small/Mid Stock.
Morningstar Categories (Fixed Income)
Fixed income fund sample includes the following Morningstar historical categories: Corporate Bond, High-Yield Bond, Inflation-Protected Bond, Intermediate Core Bond, Intermediate Core-Plus Bond, Intermediate Government, Long Government, Muni California Intermediate, Muni California Long, Muni Massachusetts, Muni Minnesota, Muni National Intermediate, Muni National Long, Muni National Short, Muni New Jersey, Muni New York Intermediate, Muni New York Long, Muni Ohio, Muni Pennsylvania, Muni Single State Intermediate, Muni Single State Long, Muni Single State Short, Muni Target Maturity, Short Government, Short-Term Bond, Ultrashort Bond, Global Bond, and Global Bond-USD Hedged.
Index Data Sources
Index data provided by Bloomberg, MSCI, Russell, FTSE Fixed Income LLC, and S&P Dow Jones Indices LLC. Bloomberg data provided by Bloomberg. MSCI data © MSCI 2024, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. FTSE fixed income indices © 2024 FTSE Fixed Income LLC. All rights reserved. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. US-domiciled mutual funds and US-domiciled ETFs are not generally available for distribution outside the US.
3. If stock picking doesn’t work, are there more reliable ways to invest?
Rather than basing an investment strategy on trying to pick the winners and avoid the losers, one approach is to simply buy and hold a slice of a market index through an index fund, gaining ownership of many different stocks. Over the past century, that approach would have rewarded you with a return that far outpaced inflation—and it would have helped you avoid the stress of trying to predict the future.
Growth of a Dollar (CAD), 1985–2023 (compounded monthly)
Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
4. Can I do better than just buying index funds?
Yes, because index funds’ focus on matching—rather than beating—benchmarks can be unnecessarily rigid. For instance, index funds have to buy and sell stocks when the benchmark they track changes its holdings, which can happen as infrequently as once a year. Like shopping for roses on Valentine’s Day, that leads to a lot of people buying the same thing at the same time, which drives up prices. Constraints like this mean that when you invest in index funds, you may be leaving money on the table.
Buying pressure can drive up prices
5. So how do I set myself up for success?
A more effective investment approach for fund managers is to be flexible, buying and selling stocks throughout the year based on information backed by financial science on what can improve expected returns.
Academic research into decades of stock returns has identified long-term drivers of outperformance. Smaller companies, those with lower prices, and those that are more profitable have had higher returns, on average. By investing systematically in the areas with higher expected returns, you can aim to beat the market.
The Drivers of Outperformance
6. Why should I invest internationally?
Investment opportunities exist all around the world, but the randomness of global stock returns makes it difficult to predict which markets will outperform from one year to the next. For example, Austria was the best-performing developed market in 2017 but the worst the next year (and, in 2021, the best again). Holding a globally diversified portfolio that targets higher expected returns better positions you to capture higher returns wherever they appear. And a strong year in one country can help offset a weaker one elsewhere.
Ranked Annual Returns for Developed Markets, 2004–2023
7. What about those hot tips I keep hearing about?
Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. If you find the barrage of hot tips tempting or unsettling, consider the source and what is news vs. entertainment. Do yourself a favor: Tune out the noise.
8. What should I do when the market tumbles?
Markets go up and down each day. When they fall, it’s tempting to pull money out in the hopes of avoiding losses. You can put money back in when things turn around, right? Think again. Research has shown that there’s no reliable way to time the market. It has also shown that the impact of being out of the market can be profound, even for just a short time. Staying invested—focusing on the long term—helps to ensure you’re in position to capture gains when prices rise.
Russell 3000 Index total return, 1999–2023
Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
9. So, when is the right time to invest?
Every day, stocks are priced to deliver a positive expected return. That means now is always a good time to invest. This goes against the “buy low and sell high” mantra that leaves some people trying to find just the right moment to invest. Frequent reports of all-time market highs may keep you from buying, thinking surely what goes up must come down, so I better wait.
But research shows that buying shares at all-time records has, on average, produced similar returns to stocks bought following a sharp decline. That means trying to time when to get into and out of markets is unlikely to lead to better results.
S&P 500 Annual Returns (USD), 1926–2023
Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
10. How can a financial advisor help?
We rely on professionals in so many areas of our lives. When you get sick, you can scan the internet searching for a remedy—or you can go to a doctor who has years of training on the best, safest way to help. Trusting an expert with your financial health is no different.
A financial advisor can provide expertise and guidance. They can help you focus on taking constructive actions that add long-term value, not impulsive ones you may later regret. And they can help you build a portfolio based on financial science that is expected to outperform the market.
Consider whether you’d benefit from help with any of the below:
If you aren’t already working with a financial advisor, use our form to receive a list of financial advisors in your area.
The Find an Advisor program is for informational purposes only. Dimensional makes no representation as to the suitability of any advisor, and we do not endorse, recommend, or guarantee the services of any advisor. Individuals should carefully evaluate any advisor whom they may consider hiring. Individuals are responsible for monitoring their advisor’s investment performance.
Risks include loss of principal and fluctuating value. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost. Diversification neither assures a profit nor guarantees against loss in a declining market.
This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions.