Active managers fell behind, again, last year

One of my wishes every year is that investors would buck conventional wisdom and avoid mutual funds run by active managers -- stock pickers who try to beat market. Unfortunately, few investors seem ready to make the switch.

Disproving conventional wisdom in investing is a personal hobby of mine, such as the notion that the third year of the presidential cycle is great for stocks. Sure, there hasn't been a single negative return for the S&P 500 during a third year since the 1930s. Since 1945, the S&P 500 has historically advanced by an average of 15.9 percent per year in the third year of a president's term, 60 percent greater than its compound return since 1926. But last year debunked that "trend"; the S&P 500 returned just 2.1 percent, well below the historic average. Other U.S. equity asset classes produced much worse results.

2011 also gave us more evidence of the futility of active managers as a whole. According to a December Bank of America-Merrill Lynch report, only 23 percent of U.S. stock-fund managers were outperforming the S&P 500 Index for the year. Other indicators helped show the failure of active management as well. The Vanguard 500 Index Fund (VFINX) beat 81 percent of funds in its category. The question is simple: When the odds are stacked against you, why play the game?

You shouldn't base investment decisions on what's almost certainly nothing more than an exercise in data mining -- torture the data enough, and it will confess.