Channel: Truth Investor

Category: Education

Tags: tradingfeesmutual fundbondsactive investingstocksasset allocationbogleheadetfindex fundinvestingis passive investing better than activespivabarclaysstandard & poorsjack bogleactivepassive vs actives&p 500passivejohn bogleexpense ratiopassive investingindex investingvanguardfinance

Description: Active and passive investing are the two main approaches investors utilize for choosing their investments. Passive investing, or index investing, is the act of purchasing a basket of securities (known as an index) that represent the market. This indiscriminate way of investing ensures you have exposure to all market sectors and does not attempt to time the market. Active investing, on the otherhand, attempts to indentify securities and market sectors that are underpriced / overpriced and take advantage of those market inefficiencies. Plenty of research has gone into discovering which of these two methods is superior. Most research supports passive investing for the following reasons: - While your returns will always match the market (and therefore never beat the market), roughly 80% of active investors fail to reach the market return and underperform - Simple and easy to do, even for an uneducated investor - Far more consistent than active investing - Low fees ================ Skip to 14:47 if you already know difference between active and passive investing and just want research data. ================ This research is well documented and some studies by various organizations are shared in this video. However, this video's goal is to share more than just empirical data on why passive is "superior." I am an active investor and my goal when putting together this presentation was to find some evidence that supports active investing for those that don't feel comfortable with blindly following the market (especially during times like these). As always, I recommend passive investing to all investors, both educated and uneducated. But if you simply can't walk that path, there is some data to support active investing if you are able to keep your fees close to zero (which retail investors are capable of doing). A lot of time went into creating this PowerPoint - it was originally designed for a course I wanted to teach, but plans fell through for that course (at least for now). I hope this video provides some value to you as an investor regardless of how far along you are in your journey. ================ Some Sources ================ MorningStar’s Active vs. Passive Barometer: morningstar.com/lp/active-passive-barometer Mutual Fund vs ETF total assets (dated): morningstar.com/blog/2018/03/12/fund-flows-charts.html Active vs. Passive fund total assets (dated): bloomberg.com/news/articles/2019-09-11/passive-u-s-equity-funds-eclipse-active-in-epic-industry-shift Money flows in 2019: morningstar.com/articles/961935/2019-fund-flows-in-9-charts Active vs Passive Funds since 2000: morningstar.com/blog/2019/11/11/money-market-flows.html S&P Indices vs. Active (SPIVA): us.spindices.com/spiva/#/reports Useful article on why active management tends to underperform, especially during bull cycles: pragcap.com/putting-the-underperformance-of-active-managers-in-perspective According to Vanguard, active management does NOT outperform consistently during bear cycles: advisors.vanguard.com/iwe/pdf/FASAPCM.pdf Another paper by Vanguard on why passive funds beat active funds even in bear markets (Kind of, only looks at 2008). Also worth looking at the sources they cite for why expense ratios are biggest determinant of mutual fund performance: advisors.vanguard.com/iwe/pdf/ISGZSG.pdf When active management has outperformed passive management: nb.com/en/global/insights/the-overlooked-persistence-of-active-outperformance Active Manager Performance – With fees and without fees: morningstar.com/articles/901361/why-active-funds-have-outperformed-in-theory-but-fallen-short-in-practice List of Fees: thebalance.com/ask-about-fees-before-you-invest-2388527 Trends in fees and expenses (2018). Key takeaway is average active mutual fund has expense ratio of 0.76% and average passive mutual fund has expense ratio of 0.08%: ici.org/pdf/per25-01.pdf Trends in fees and expenses (2018) – This one is from MorningStar instead of ICI. Difference is active mutual fund expense ratio is 0.67% here and passive mutual expense ratio is 0.15%: morningstar.com/articles/925303/2018-morningstar-fee-study-finds-that-fund-prices-continue-to-decline More research that illustrates active funds beat passive funds when fees aren’t involved: indexologyblog.com/2019/06/05/evaluating-active-versus-passive-performance-through-a-risk-lens ================ My Platforms: Twitter: twitter.com/Truth_Investor Steemit: steemit.com/@cryptovestor Medium: medium.com/@Truth_Investor Seeking Alpha: seekingalpha.com/author/truth-investor/articles