Excerpted from Common Sense on Mutual Funds by John C. Bogle, pages 215-217

Next, let's examine the public records of advisers who recommend mutual funds. For the past five years, The New York Times has published, each quarter, the records of equity fund portfolios selected and supervised by five respected advisers who began their task on July 7, 1993. During this period, not one of the portfolios has come close to matching the record of the Vanguard 500 Index Fund, which was chosen by the Times as the appropriate comparative standard. The advisers' average annual return of 11.8 percent provided 59 percent of the annual return of the market, and the Index fund provided 99 percent (see Figure 9.1). While some of these advisers chose equity portfolios that were designed to be somewhat less risky (i.e., less volatile) than the 500 Index itself, the decline in the Index during the third quarter of 1998 proved to be but 85 percent of the decline in the average fund portfolio of the advisers.

In any event, providing only 59 percent of the market's annual return during a five-year period in which even the average fund provided 70 percent represents a failure that verges on the astounding. To make matters even worse, when it comes to the capital accumulated during the full period, the average portfolio of the advisers provided just 49 percent of the final growth of the S&P 500 Index, while the Index fund provided 99 percent. Selecting winning funds, even by experts, is hardly bereft of challenges.

Another, longer-run evaluation of the success of advisers in selecting fund portfolios is the Hulbert Financial Digest. It reports that, of 59 advisory newsletters that it has tracked for a full decade, the average adviser's portfolio has provided a return of +7.9 percent. This return represented 58 percent of the market's return of 13.7 percent, as it happens, almost identical to the 59 percent figure achieved by the advisers whose returns have been reported by The New York Times study in a much shorter period. Only eight newsletters outpaced the market with their recommendations. Interestingly, and perhaps not surprisingly, that is very close to the one-in-six chance of superiority that the mutual funds themselves have displayed since mid-1982. For better or worse, during this bull-market era, many of these advisers recommended portfolios that were far more conservative than the stock market itself. On average, however, they carried a risk that closely approximated the risk of the market. With average risk but well-below-average return, their risk-adjusted return (measured by the Sharpe Ratio) amounted to just 42 percent of the market's risk-adjusted return, and only three advisers higher risk-adjusted returns than the index. In all, the accumulated evidence regarding the ability of the experts to select winning funds remains not only negative, but far worse than what informed intuition might suggest.