In 1992, the ABC news show “20/20” presented a segment on investing. One of their reporters threw darts on a wall covered with stock listings as a way to choose stocks for a portfolio.
Top Wall Street firms of the time were invited to compete. The dart portfolio came in second place out of 10 contenders.
Was this a fluke? No, it was an entertaining illustration of the difference between passive and active investing. If this were carried out again, the results would be similar.
Active investors believe that through diligence, analysis and superior information, pricing mistakes can be found in the market. They believe these mistakes, securities that are worth more than currently priced, can be found and will outperform the market.
Passive investors believe that the market has very few mistakes, it efficiently prices securities. They invest across thousands of companies and hold them long-term, usually by buying passively managed funds.
For you skeptics, here is an example with a lot of data. FutureMetrics looked at 192 large U.S. Pension funds from 1988 to 2005, 18 years of data, and ranked them in annualized performance.
Only about 25 percent of them beat a very na?ve 60/40 portfolio (60 percent S&P500 Index/40 percent Bond Fund Index). Seventy-five percent of these top notch active investing firms, employing many analysts, underperformed the na?ve 60/40 portfolio.
If you look at annual rankings of mutual funds in any asset class, about 10 to 25 percent of the actively managed funds beat the index fund (passive) each year. Seventy-five to 90 percent underperform the index.
Year to year, the winners don't repeat. The actively managed funds bounce around at random in the rankings, while the index fund remains at about 10 to 25 percent from the top.
Couldn't an investor just pick one of the winning active managers on day one of your investment time horizon? Now, you see the challenge: How do you identify that long-term active investing winner in advance?
The same Nobel Laureate Prize winners that developed passive investing concepts have said the odds of picking the right active manager for a typical 30 year time horizon are about the same as winning the lottery.
How do you implement this newfound knowledge? Go to www.vanguard.com and set-up a portfolio consisting of a basket of low expense ratio index funds providing you exposure to the large cap, small cap, international, emerging markets and bonds.
Mix the percentages of the index funds based on your risk tolerance, goals and time horizon. Rebalance every six months or so.
Not a do-it-yourselfer? Find an advisor that will invest your money in passive funds. Some elite advisors have access to institutional passively managed funds that outperform the index funds available in the retail market.
For more information, call (760) 804-0910 or visit www.oreillywa.com.
Top Wall Street firms of the time were invited to compete. The dart portfolio came in second place out of 10 contenders.
Was this a fluke? No, it was an entertaining illustration of the difference between passive and active investing. If this were carried out again, the results would be similar.
Active investors believe that through diligence, analysis and superior information, pricing mistakes can be found in the market. They believe these mistakes, securities that are worth more than currently priced, can be found and will outperform the market.
Passive investors believe that the market has very few mistakes, it efficiently prices securities. They invest across thousands of companies and hold them long-term, usually by buying passively managed funds.
For you skeptics, here is an example with a lot of data. FutureMetrics looked at 192 large U.S. Pension funds from 1988 to 2005, 18 years of data, and ranked them in annualized performance.
Only about 25 percent of them beat a very na?ve 60/40 portfolio (60 percent S&P500 Index/40 percent Bond Fund Index). Seventy-five percent of these top notch active investing firms, employing many analysts, underperformed the na?ve 60/40 portfolio.
If you look at annual rankings of mutual funds in any asset class, about 10 to 25 percent of the actively managed funds beat the index fund (passive) each year. Seventy-five to 90 percent underperform the index.
Year to year, the winners don't repeat. The actively managed funds bounce around at random in the rankings, while the index fund remains at about 10 to 25 percent from the top.
Couldn't an investor just pick one of the winning active managers on day one of your investment time horizon? Now, you see the challenge: How do you identify that long-term active investing winner in advance?
The same Nobel Laureate Prize winners that developed passive investing concepts have said the odds of picking the right active manager for a typical 30 year time horizon are about the same as winning the lottery.
How do you implement this newfound knowledge? Go to www.vanguard.com and set-up a portfolio consisting of a basket of low expense ratio index funds providing you exposure to the large cap, small cap, international, emerging markets and bonds.
Mix the percentages of the index funds based on your risk tolerance, goals and time horizon. Rebalance every six months or so.
Not a do-it-yourselfer? Find an advisor that will invest your money in passive funds. Some elite advisors have access to institutional passively managed funds that outperform the index funds available in the retail market.
For more information, call (760) 804-0910 or visit www.oreillywa.com.