Beat Index Funds By More Than 10% Per Year

This year Vanguard became the largest mutual fund family. They preach that index investing beats stock picking and market timing. The truth is that there are several easy ways to beat index funds. You can beat the S&P 500 index funds by more than 11% annually by following mutual fund flow data, for example. We at Insider Monkey have been showing you how to make high returns by using novel investor sentiment data, like the Roubini Sentiment Indicator or the Permabear Sentiment Index. Stock prices don’t always reflect the true fundamentals. In the short run, investor sentiment and funds flowing in and out of the stock market have a bigger say in the direction of prices. Let me say that again in other words: don’t trust that stocks are priced correctly in the short run. When permabears Roubini, Schiff, or Faber dampen investor enthusiasm by their comments, investors decide to pull their funds out of the stock market. When permabulls dominate the news cycle, investors decide to put more funds into the stock market. One way of following investor sentiment is using our permabear sentiment index; another way is by following mutual fund flow data provided by Investment Company Institute.

The correlation coefficient between the S&P 500 returns and the monthly funds flowing in and out of the mutual funds is 0.52. Between February 2007 and August 2010, the SPY (an index fund tracking the S&P 500 index) returned an average monthly return of 1.85% when there was an inflow of funds. When there was an outflow of funds, the SPY returned an average return of -1.48% during the same time period. These are amazing numbers. You could be the next Warren Buffett if you had a way of knowing the fund flows in advance or in real-time. In fact, the Permabear Sentiment Index predicts this indirectly.

Mutual fund companies have this valuable data in real-time, and they publish weekly fund flow estimates with a 2-week lag. This means, by the end of each month we pretty much know whether we have positive or negative fund flows during that month. Can we still make large returns even though we have delayed access to the fund flow data? Insider Monkey’s analysis shows that we can still achieve an annual 11% return over SPY when we utilize the previous month’s fund flow data. Our investment strategy is very simple. When there is an inflow of funds during the previous month, we go long the SPY for a month. When there is an outflow of funds, we sell the SPY short for a month.

Active Investing vs. Passive Investing

Excellent Results: During the past 3.5 years the SPY returned an average of -0.4% per month. This is our benchmark.  When there was an inflow of funds during the previous month, the SPY returned an average of 0.15% per month. When there was an outflow of funds during the previous month, SPY returned an average of -0.69%. Overall, our strategy returned an average monthly return of 0.50% per month compared to -0.40% per month for our benchmark. This means that our strategy beats an average John Bogle Vanguard investor by 0.9% per month or by 11.3% annually during the past 3.5 years. Find out more about how to beat index funds at Insider Monkey, your source for free real-time insider trading data.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!