Active Versus Passive Snippet

From my recent blog post on long term strategic investing, most readers will understand that I prefer a well-thought out steady and slow approach to portfolio management.  A broadly diversified strategy across all of the major asset classes will help to smooth the return profile to achieve financial goals.  As they say, it is not “market timing” but “time in the market” that helps create wealth!  But, where does the return really come from?  What is the best way to get exposure to broad asset classes? One aspect of these questions obviously leads to the “active versus passive” management debate.

Simply stated, passive investing employs rules-based index investments to create a risk-based portfolio.  Recently, a fully diversified global multi-asset portfolio of passively-managed exchange-traded funds (ETFs) can be built for well under a 0.15% underlying investment expense ratio.  On the other hand, active investing uses stock and bond pickers to actively select (and de-select!) stocks and bonds as part of an investment strategy.  The average expense ratios for active large blend stock strategies can cost 0.75% (or more!)

S&P Dow Jones Indices has produced the well-known semi-annual updates on this debate titled the “SPIVA U.S. Scorecard”.  At year end 2018, the active versus passive debate continued to show active managers lagging their passive benchmarks.  The most recent report includes 37 pages of text and tables, but the summary headlines are telling: “2018 was the fourth-worst year for U.S. equity managers since 2001; 68.83% of domestics equity funds lagged the S&P 1500 during the one-year period ended Dec. 31, 2018.”  Also, “for the ninth consecutive year, the majority (64.49%) of large-cap funds underperformed the S&P 500.”

Of course, it would be great if you could just “avoid” the 68.83% that underperformed!  Unfortunately, it is not that easy!  According to SPIVA, through work published in their Persistence Scorecards, “relatively few funds can consistently stay on top.”

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