Active managers attempt to identify stocks with above-average performance, but we often remind you that active fund management doesn’t work. They just charge more for the privilege of handling your money and trying to second-guess the market.
The jury is not out on this. Lots of data supports our claim.
You’ve probably seen this disclaimer: “Past performance is no guarantee of future results”. Yet past performance is all active managers can go on!
SPIVA stands for S&P Indices Versus Active. Their first US scorecard was published in 2002. They also do a Europe scorecard. Here are the 2021 year-end highlights:
- The S&P Europe 350 fund was up 26.1% against the previous year
- 74.8% of actively managed Europe Equity funds did worse than that over the same year
- 83.2% of Europe Equity funds underperformed the S&P Europe 350 over ten years
SPIVA frequently reports that any short-term success typically dissipates as the time horizon increases. They say: “Short-term success, when it occurs, may arise as much from luck as from genuine stock selection skill”.
For example, from December 2011-December 2016, only 27% of top-quartile U.S. large-cap funds remained in the top quartile for the next five years, slightly above the 25% rate if performance were completely random.
Passives’ outperformance includes the years where the market crashed.
We get our information from SPIVA and the MorningStar Active/Passive barometer. We also follow the advice of super-investor, Warren Buffet.
What Warren says
In 2020, he said: “In my view, the best thing for most people is to own the S&P 500 index fund”.
Because it’s a low-cost and broad-market investment.
Costs are low because the fund is passively managed. The risk is spread because it’s widely diversified.
Index funds can grow significantly if you wait. In fact, the stock market has averaged annual returns reaching 10% over the long-term.
What this means to you
Warren Buffet’s Will declares he wants the money he leaves for his wife to be invested with 10% of the cash in short-term government bonds and 90% in the S&P 500 index fund.
He suggests Vanguard – which is the one we most often use for clients.
We hope this reassures you that the debate is kept alive far beyond Plan 100. There are bigger forces out there who are also challenging the common narrative.