ITA Wealth Management

Are you looking for more evidence why we are recommending a “mosaic approach” to investing? Look no further than the references below. Here is a snippet from the conclusion of the paper listed below.

“Our analysis of the performance of the mutual fund industry shows that approximately 76.6% of All funds have zero alphas. This confirms the predictions of the Berk and Green (2004) model, asserting that, in equilibrium, open-end mutual funds yield no performance. Among the remaining funds, 21.3% of them yield negative alphas. It implies that the average negative alpha documented in the previous literature does not reflect the performance of the majority of funds, but is rather driven by a minority of 20%. Finally, we find a tiny proportion of 2.1% of funds with positive alphas.”

For those who never heard of alpha, it is the value a portfolio manager adds to the portfolio through decisions such as stock selection, asset allocation, market timing, etc. Here is a more precise definition. Think of alpha this way. When the IRR of one of our portfolios exceeds the VTSMX benchmark, we are adding value to the portfolio. In the three portfolios covered in detail over in Premium Content, we seek to add alpha by our asset allocation decisions.

Here is the New York Times article and below is a link to the original research article.

http://www.rhsmith.umd.edu/fac….ance3c.pdf

Lowell Herr

Photograph: Lake Oswego street art

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