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CHAPTER 22
YOUR 401(k) ACCOUNT AT S&S AIR
1. Before the fact, you would expect that mutual funds managers would be able to outperform the market.
This is due, in part, to the Darwinian nature of the business. Good performing fund managers are richly
rewarded, and poor performing fund managers are fired, often very quickly. In reality, we should expect
that less than 50 percent of all equity mutual funds would outperform the market. This does not depend on
We should also consider that mutual funds managers may be able to outperform the market before
expenses. Whether they can outperform the market on an after-expense basis becomes a question of
whether mutual fund managers can extract economic rents from the stock market. The evidence tends to
2. The results in the graph tend to support the idea of market efficiency. Consider the case of the Fidelity
Magellan Fund, one of the largest actively managed equity mutual funds at the time this was written, with
assets of about $17 billion. So the question is this: What would Fidelity pay for one year to increase the
return of the Magellan Fund by .01 percent? If we multiply the fund assets by .01 percent, we get:
CHAPTER 25 C-2
3. Given that the evidence presented tends to support market efficiency, you should invest in the
S&P 500 index fund. However, this is not the entire answer. By investing the entire equity portion of your
