|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."
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.