From Dodge -
Yes, but the individual investor is also significantly less knowledgeable, has significantly less access to information, puts significantly less time into it, and has significantly less training. I actually agree with you, if we're talking about the individual investor, and a long timeline (50 or so years until you die), it's likely closer to 99.99999% who will end up with less money. But I have no data for that one :)
The paper he quoted said 75.4% of active mutual fund managers have returns consistent with the market over a long time frame. 0.6% consistently beat the market. 24% returned less than the market after transaction costs and fees. Keep in mind transaction costs and fees average 2.5%
KC and Dodge, I would hope that you educate yourselves on why active managers have a hard time beating the market.
Let's look at at individual investor vs an active mutual fund manager:
Transaction Costs and Securities available-
The individual investor can pay as little as $1 per trade on a couple hundred shares or $7 per trade for up to 2k shares. These shares are held at a brokerage. He submits a limit order, and the order is traded electronically. 2k shares represents about 4% of the daily volume of a relatively illiquid stock that trades 50k shares per day.
The fund manager may hold 1M or more shares. That company that trades 50k shares per day, it would take the manager well over a month to establish that position. Does the manager do this?
No, they limit themselves to stocks with more liquidity. This is one of the huge problems with index funds as well. Large well run companies are often not in the indexes because of liquidity ie. Berkshire - 200B at the time and not in the S&P.
If you are a fund manager and want to buy 1 M shares of TWC (an S&P 500 company with good liquidity) it would take you about a week to establish the position. This requires a trader to sit at a desk and manually trade large blocks of shares with other traders. This guy is billing at >$300 an hour. You also cannot say buy or sell XX at $20. These are huge positions. You will buy and sell something between $20-21 after a week your average price may be $20.10 meaning the transaction cost you 0.5% over an individual investor saying sell at $20.
Redemptions-
In 2008 an individual investor holding a IBM had the ability to sell it a buy WFC. (this is an example, it could be any company or group of companies). In this case, the individual investor would have made twice as much money in WFC than in IBM.
In '08 the fund manager was hit with people pulling money out of his fund left and right. He may have wanted to sell IBM to buy WFC, but has to sell IBM to give money back to a client. This is a huge problem for the fund managers and one of the reasons funds with lock up periods - hedge funds - or permanent capital - Berkshire out perform active mutual funds.
Window dressing-
An individual investor doesn't have to deal with this. They don't answer to clients.
The fund manager has to explain why Apple is their largest holding after the stock tanked from $700 to $450. They often sell a company after a large fall because clients may think: I'm taking my money out, this idiot didn't even predict Apple was going to lose 35%. This is dressing up your quarterly and annual reports to make them look prettier to your clients.
76% of fund manager managed to match the index despite the above working against them and while charging an average fee of 1.08%!
I'm not saying this means you should be investing with active managers. I am saying they have a lot working against them and by virtue of matching the market after 2.5% worth of fees and having to deal with redemptions and keeping clients happy the majority are actually
beating the indices.
I am spoon feeding this to you all because instead of thinking critically about the article you posted, or typing window dressing, the effect of redemptions, or mutual fund investment universe size limitations into google; you look at a chart and say "see indexing wins!" Indexing provides clients superior returns due to index funds not having to deal with many of the detractors facing active funds. Indexes are not magic and active managers are not stupid. They just cannot outperform the market by >2.5% on a consistent basis.
As far as individual investing in individual stocks or ETFs is concerned. An individual investor could use low cost vanguard ETFs to simulate a more equal weight index that will beat VTSMX. Index funds two largest problems are being market capitalization weighted, and having a smaller universe of companies to add to the index because of liquidity.
VTSMX has a good performance history but you are a fool if you think it is well diversified. It has more money in its first 6 holdings (AAPL, XOM, MSFT, JNJ, WFC, GE) than in their last 1470 holdings. Why is this? It goes back to their potential investment universe with size and liquidity restrictions.
Indexing and ETFs also artificially inflate the cost of stocks which are included in the index by virtue of having a huge portion of the available share float held by the index fund vs companies not a part of the index. See this paper by Horizon Kinetics detailing US vs Canadian REITs and the effect of indexing on available yield:
http://www.horizonkinetics.com/docs/December_Commentary_Canadian_REIT.pdf