Active vs Passive Management

Consistently beating the market is near impossible

Portfolio managers are very well paid, earning upward of 2 percent annually from pools of investor money that can top a billion dollars. They are supposedly able to identify, analyze and select winners from the vast universe of stocks in the major stock indexes. A good year is one in which the manager’s return exceeds the return of the index. A successful manager is one who consistently beats the index.

So, how are they doing? The results are not very flattering. Over a five-year period, from 2006 to 2010, only 48 percent of managers of large-cap funds were able to beat the S&P 500. The vast majority of them barely edged out the index. What this means, is that in that period of time, if you had simply invested in an S&P 500 index fund, which required no active portfolio management (so, you wouldn’t have paid the 2 percent investment management fee), you would have earned a better return than more than half of the portfolio managers.

And Morningstar estimates that the returns on portfolios that tried to time the market over the last decade underperformed the average return on equity funds by 1.5 percent during that period, and that includes several years of negative returns. To do better, investors would need to have called the market shift seven out of ten times, a feat that true timing pros have a hard time matching.

At Winship Wealth Partners, we apply decades of academic research in debunking the biggest investment myths so our clients can focus on their long-term investment strategies using proven principles and practices.