Active Versus Passive Investing
Active investors use stock selection and market timing techniques. Stock selection is the art of finding “attractive” stocks and/or bonds and holding them until the rest of the world realizes their true worth and bids the price up. Market timing is the art of moving in and out of the stock market at the “right” times. Active management is the predominant model for investment strategy today.
Passive investment managers make no attempt to distinguish attractive from unattractive securities, forecast securities prices, or time market trends. Instead, passive managers invest in broad sectors of the market, called asset classes, and accept the average returns various asset classes produce.
Passive investors allocate assets based upon probable asset class risks and returns. They diversify widely within and across asset classes and maintain allocations long-term through periodic rebalancing.
Research supporting passive management comes from the nation’s universities and privately funded research centers, not from Wall Street firms and active managers, who have a vested interest in the huge profits available from active management. The results from this research are very clear: Active investment management is an appealing mirage which substantially boosts costs and decreases returns compared to a properly designed passive portfolio.
Years of research show that, over time, passive funds do better than funds run by active managers.
Wall Street and the Media Are Not Your Friends
Why do investors buy expensive managed funds? Because that is what their brokers sell, or because they have been misled by the media, which needs to promote the “hot” fund manager of today (who may become tomorrow’s loser.)
There is No Statistical Evidence of the Persistence of Superior Performance.
While it is true that every year some active managers will excel, there is no way to identify, ahead of time, which active managers will outperform their benchmarks. Past performance of money managers is unrelated to their future performance. Track records mean nothing.
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