Outperformance in Down Markets 100% of the Time?

Yes, this title is a little click-baitish, but with all the other crazy headlines floating around I figured I’d throw out this provoking question.

I didn’t make it up, however. How one could have outperformed “100% of the time” in the “longest” bear markets was detailed in a report published by a well-respected research center in 2001 (more on this below).

A lot has been written about the historical outperformance of index funds, but related to my title question, many are now saying that they haven’t really been tested over full market cycles and are suggesting that index strategies will “exacerbate” investor losses in a downturn.

On almost a daily basis, I’m seeing headlines and hearing emotional pitches about the current dangers of index funds, with warnings about the ways they might harm investors in more volatile or bear markets. With ongoing market drops and large swings, this talk is sure to persist.

I would encourage many of the commentators predicting doom about index funds to tone it down a little, however, (emotion rarely leads to good long-term investing decisions) and, along with investors, to review the following studies. 

The studies aren’t perfect, but they do seem to provide useful down-market data.

What do they show?

An S&P Dow Jones report from 2009 might be a pretty good place to start.

This report showed that, “A majority of active funds in eight of the nine domestic equity style boxes” underperformed their appropriate indices in the 2008 down-turn and produced “similar outcomes” in the 2000 and 2002 bear markets.

In an arguably more robust fashion, in 2001, the Schwab Center for Investment Research also found the following in the study I referenced at the beginning of this post. After analyzing the performance of over 2000 actively managed funds and 120 index funds during market declines between December 1986 and March 2001:

  • Index funds outperformed actively managed funds in 55% of the down markets
  • In the worst downturns, defined as declines of 10% or more, index funds outperformed actively managed funds 75% of the time
  • In the longest downturns, defined as declines of 5 consecutive months or longer, index funds outperformed actively managed funds 100% of the time

I’m sure this debate will continue in a robust fashion, but if you think Buffett, Munger and many other seasoned professionals are correct when they suggest that the key to success is avoiding mistakes, then the independent evidence seems to be clear.

The probability is quite high that an investor who tries to pick an active equity investment manager at the correct time in either up or down markets will make a lot of mistakes.

And, sorry professional adviser and consultant peers, but as I’ve mentioned in other posts, apparently we aren’t very good at picking managers either.

As a reminder, according to a study published by the Journal of Finance in 2014, researchers from the University of Oxford and University of Connecticut found “no evidence” that recommendations from institutional investment consultants “add value.”

Based on my past life as a successful seller of prognostications and active managers that supposedly offered down-side protection, a big part of me wishes this wasn’t so (see Say It Ain’t So Joe, Again or the most recent SPIVA Persistence Scorecard).

As I’ve written in more than one piece, I’m not trying to win a debate about which style of investing is better.

Some active strategies can be appropriate and, as I also wrote, “if investing in an active strategy makes an investor feel more comfortable and will allow him or her to stick to a plan more easily then, regardless of the relative performance versus an index, this might be the correct choice.”

I’m just hoping that the next time you hear a bull or bear market pitch, you will ponder how it is being presented, the emotions it invokes, and how it might be designed to drive investor behavior.

Remember, “Never ask a barber if you need a haircut” (thanks Warren).

Instead, consider these sage quotes from David Swensen, who on behalf of Yale has proven himself to be one of the most successful investors in the world:

“A serious fiduciary… recognizes that only extraordinary circumstances justify deviation from a simple strategy…”


“When you look at the results on an after-fee, after-tax basis over a reasonably long period of time, there’s almost no chance that you end up beating an index fund – the odds are 100 to 1.”


Special thanks to Dougal Williams, who had saved a hard copy of the 2001 Schwab Research study that does not exist on the internet.

3 thoughts on “Outperformance in Down Markets 100% of the Time?

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.