And here are some highlights of the 2018 Mid-Year SPIVA US Scorecard (bold added):

• Despite the market turmoil seen in the first quarter of 2018, the U.S. equity market posted positive returns over the 12-month period ending June 30, 2018, with small-cap stocks leading the pack. The S&P SmallCap 600 reported 20.50%, while the S&P 500 and the S&P MidCap 400 posted 14.37% and 13.50%, respectively.
• During the one-year period ending June 30, 2018, the overall percentage of all domestic funds outperforming the S&P Composite 1500 increased (42.02%) compared with six months prior (36.57%).
• Over the one-year period, 63.46% of large-cap managers, 54.18% of mid-cap managers, and 72.88% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively.
• Despite small-cap equity performing the best, more small-cap managers underperformed the S&P SmallCap 600 over the one-year period compared with results from six months prior.
• Overall performance of active equity funds relative to their respective benchmarks over the medium term also improved, although the majority still underperformed their benchmarks. Over the five-year period, 76.49% of large-cap managers, 81.74% of mid-cap managers, and 92.90% of small-cap managers lagged their respective benchmarks.
• Similarly, over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis.

MP: Stated differently, over the last 15 years from June 30, 2003 to June 30, 2018, only one in 13 large-cap managers, only one in 21 mid-cap managers, and one in 43 small-cap managers were able to outperform their benchmark index. So it is possible for some active fund managers to “beat the market” over various time horizons, although there’s no guarantee that they will continue to do so in the future. And the percentage of active managers who do beat the market is usually pretty small – fewer than 8% in most of the cases above over the last 15 years; and they may not sustain that performance in the future. For many investors, the ability to invest in low-cost, passive, unmanaged index funds and outperform 92% of high-fee, highly paid, professional active fund managers seems like a no-brainer, especially considering it requires no research or time trying to find the active managers who beat the market in the past and might do so in the future.

Here’s an analogy, perhaps it’s not perfect: Suppose you could be guaranteed to score in the 95th percentile on the LSAT, MCAT, GRE, or GMAT exam without studying for even one minute. Wouldn’t that be appealing to most people compared to the alternative of spending a lot of time studying and probably getting a lower score? If I can out-perform 95% of active managers with a Vanguard or Fidelity index fund for almost free (0.04% expense ratio), that choice to me seems easy: go with index investing.