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Passives Beat Actives Last Year

January 31, 2017

A perennial quandary for investors is whether passive investing makes more sense than active investing. For my typical client I believe passive is a better move. I have clients that are sophisticated traders or who use high powered investment managers and my blogs do not address them. I do feel the average investor can benefit from the guidance provided by my blogs and that is who I write for.

By way of definition, passive investors try to duplicate and are satisfied with the market index returns. Active investors seek to exceed the performance of the indexes which are available in index funds as well as exchange traded funds (”ETFs”). Your broker or investment manager can advise you on what is most appropriate for you. Here is a brief discussion of these two major investment styles.

Two weeks ago JPMorgan issued their 2016 analysis indicating that 65% of the actively managed mutual funds did not do as well as the underlying indexes for their portfolios. This is approximately the same result as for 2015. Passives beating actives is so ubiquitous that if for some chance the active funds beat the passives it results in a well headlined news story. For example on Nov 7 a Barron’s cover story heralded “Active Beats Passive” because 60% of actives beat the passives for the four month period since July 1. Those that read my blogs know that I use an investment horizon of at least seven years. There will always be short periods of great performance of actives over passives, but I don’t expect that for longer periods.

Another observation is in this week’s Barron’s that had an article by Andrew Bary about the Harvard University endowment fund’s underperformance over the last 10 years and how they are now considering index funds. The article also referred to Warren Buffett’s constant exhortations about the benefits of passive funds.

No one knows everything or has all the answers, and many do not even understand the right questions to ask, but it seems to me that investing in low cost index funds with reasonable and steady dividends makes more sense for most people than chasing greater gains which are dubious at best.

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