Active vs. Passive Investing

Studies have shown that often fewer than 10% of active funds outperform their passive benchmarks in the long-term, yet most investors still try to find the next big winner. Dave and Andrew explain why it rarely works.

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I find it interesting how we can’t pick the future out-performers. As you know, there are very few of them. Fewer than 10% of actively managed funds outperform over any 5, 10, 15 year period. Sometimes fewer than 5%. But we are very adept at picking the significant under-performers in the future because we tend to rush into the hot recent performers.

And then they were hot because they were in the right place, right time, right place. Sector regression of the mean sets in. And we often underperform by even more than the fee. So if the fee’s 2.2, our underperformance is often 3.5 to four, and of course over an extended timeframe, the difference that makes in your retirement pool of capital is enormous.

So some people say, well, you can have 25 and 30% less. I’ve seen many cases where I’ve done the comparison, if people had just gone broad market averages, they would’ve 40 to 50% more than they end up with 60% more in many cases. Crazy.

Yeah, you can see that data. Interestingly, about every six months, Veeva puts out the Spiva Persistence Scorecard and it’s, it’s, it’s amazing because they’ll look at the top quartile performing funds during a given might be a five year period. They go out two more years to see what percentage of those top quartile performing funds are still in the top quartile, and it usually ends up being between zero and 6%,

That’s right.

And then you go, you go again another two years on. And those funds, of course, they’re not in that top quartile any longer. So yeah, you’re right. People end up chasing their own tails. So it’s the part that we have to master is that emotional part.