Passive vs. Active Investing: The Battle Rages On

In the active vs. passive investing fight, we’re firmly
on the side of passive investors.

Active versus passive management is a long-raging battle among investment managers. On one side are the active managers, who believe that through careful research and individual stock picking they can beat a stock market index portfolio over time. On the other side are the passive advocates who argue that an investor is best served by buying a low-cost, broadly diversified portfolio that tracks a market index. In case we have to tell you, Berno Financial Management has been in the passive camp for years.

"It may sound un-American not to try to be the winner, but when investing, capitalism favors a passive approach."
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Gauging a Fund's Performance

Standard & Poor's, publishers of the popular Standard & Poor's 500 Index of U.S. large company stocks, conducts extensive research on fund versus index management performance. S&P recently released its June 30, 2013, report, which is summarized below:

Percentage of U.S. Equity Funds Outperformed by Benchmarks 06/30/13

Fund Category Comparison Index One Year % Three Year % Five Year %
All Large-Cap Funds S&P 500 59.58% 85.95% 79.46%
All Mid-Cap Funds S&P MidCap 400 68.88% 85.78% 81.98%
All Small-Cap Funds S&P SmallCap 600 64.27% 80.19% 77.88%
All Multi-Cap Funds S&P Composite 1500 63.41% 84.31% 82.57%

Over five years, roughly 80% of actively managed funds underperform their benchmark. An individual investor has a much higher probability of earning the market return in a passively managed index. They have a great risk (about 80%) of under-performing in an actively managed fund. Why take that risk? Add to this debate that past performance is not a guarantee of future returns (one of the top 20% of funds today has a low probability of staying in the top 20% over the next five years), and you have a very sound argument for passive management.

It's a free country, but don't argue with the facts. It may sound un-American not to try to be the winner, but when investing, capitalism favors a passive approach.