Friday, June 26, 2015

Active Vs. Passive

Since we haven't done this in a while, time for an investing post (aimed at those striving to put money away for retirement.)

Morningstar has data for participants in 401(k) funds ... and plain old investors.

... The Active/Passive Barometer finds that actively managed funds have generally
underperformed their passive counterparts, especially over longer time horizons
, and
experienced higher mortality rates (i.e. many are merged or closed).

In addition, the report finds that failure tends to be positively correlated with fees (i.e. higher cost funds are more
likely to underperform or be shuttered or merged away and lower-cost funds were likelier to
survive and enjoyed greater odds of success). ...

High costs = higher failure. Big surprise (not). ...

But it ain't just lower cost passive funds. Active funds with below-average costs are likely to outperform higher-cost active funds over the decade studied. (But whattayaknow? low-cost active funds still have lower average annualized returns compared with the average passive fund in nine of the 12 categories studied in the report.)

Morningstar goes on:

* Investors would have substantially improved their odds of success by favoring
inexpensive funds, as evidenced by the higher success-ratios of the lowest-cost funds in all
but one category.

* On the flip side of the coin, investors choosing funds from the highest-cost quartile of their
respective categories reduced their chances of success in all cases.

* The large value category is the most poignant example. The lowest cost funds in this segment
had a success rate that was 28 percentage points higher than the category average during the
decade ending December 2014. Meanwhile, their high-cost peers had a dismal success rate
of just 18.6% during this same span.

* Odds of success generally decreased over longer time periods with value-oriented funds being
the notable exception. ...

What we take away from the report is: broad diversification and low costs are keys for building up a stash that can carry you into retirement. The other part of the investing equation: When you set up an investment strategy and asset allocation plan, stick with them. Most people bail out when stock markets plummet (remember '08?). But in truth, down markets are the best opportunities for buying ... if only the average person had the stomach to do so. (Most don't.)

The axiom "Don't do something. STAND there" applies in long-term investing.


Site Meter