It’s always nice to see another study showing that active management doesn’t work. We know this, but it’s nice to get confirmation in the financial media – as opposed to their normal fare of “The Stocks You Need to own NOW.”
Active management just adds expense and random noise to your returns. In the absence of those expenses, we would expect to see roughly half of managers win, and half of them lose.
Unfortunately for those managers, they need to contend with those expenses. This is what explains the fact that over five consecutive twelve-month periods, only 0.81% of domestic equity funds remained in the top quartile.
The article tries to highlight the times when active management works for investors, but they don’t come up with much. The data point they use to call this out is that 53% of active managers beat their benchmarks over the third quarter.
However, in the second quarter only 34% beat their benchmarks. And over the first half of the year, only 14% of active managers in the US Large Cap equity space beat their benchmarks.
The fact that half beat their benchmark and that’s the only example they have of outperformance is pretty effective damning with faint praise. Over an incredibly short period of time, you basically have a 50/50 shot of beating the benchmark (which you can mirror pretty effectively every day with an index fund).
That’s no reason to jump up and down.
Active management doesn’t work. What works is building a well-diversified, risk-appropriate, portfolio and focusing on harvesting the long-term market returns.
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