Only Human: Passive Still Beats Active Investing

Sunday, October 29, 2006 | 09:18 AM

Yes, it remains true: Indexing is a better strategy than active investing. Passive beats most Humans. Various academic and market studies continue to demonstrate this:

"This year through September, only 28.5 percent of actively managed large-capitalization funds — which try to beat the market through stock selection — were able to outpace the S.& P. 500 index of large-cap stocks, according to a new study by S.& P. In the third quarter alone, it was even worse, with only one in five actively managed large-capitalization funds beating the index.

That isn’t terribly surprising, said Rosanne Pane, mutual fund strategist at S.& P., because active managers tend to have difficulty beating indexes when market leadership changes. And in the third quarter, many stocks that had paced the market for much of this decade began to fall behind. Small-company stocks were finally beaten by shares of big, blue-chip companies; sectors like energy also started to lose ground.

Still, such transitional periods aren’t the only good times for indexing. S.& P. research shows that while active management fared poorly in the third quarter, it has actually been lagging behind the indexes for a considerable period.

Over the five years through the end of the third quarter — a span that included both bull and bear markets — only 29.1 percent of large-cap funds managed to beat the S.& P. 500. What’s more, only 16.4 percent of mid-cap funds beat the S.& P. 400 index of mid-cap stocks, and 19.5 percent of small-cap funds outpaced the S.& P. 600 index of small-company shares. “The long term does seem to favor the indexes,” Ms. Pane said."

Why do investors bother? Aside from the few who are unaware of the research, my guess is many are attracted by the glory of being part of the 65% that manage to beat the market every so many years: 


Beating_spx

Source: Standard & Poor's; Data thru 9/30/06

>

For the rest of the time, we all want to be special -- in the 20-40% or so who do manage to outperform the indices most years.

 Of course, it's likely a different 20-40% each year, and is more likely a function of style or asset class (Emerging market, Small Cap, Value, etc.)

Yes, that's right:  another example of how when your emotional side trumps your rational side, you forfeit gains. Don't be too hard on yourself, you are only Human.

>

>

Source:
If You’re Playing ‘Beat the Benchmark,’ Don’t Expect to Win
PAUL J. LIM
NYT, October 29, 2006
http://www.nytimes.com/2006/10/29/business/yourmoney/29fund.html

Sunday, October 29, 2006 | 09:18 AM | Permalink | Comments (8) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

bn-image

TrackBack

TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8341c52a953ef00d834c29a9053ef

Listed below are links to weblogs that reference Only Human: Passive Still Beats Active Investing :

Comments

does anyone think that this rally is the handiwork of our treasurer and FR chairman as a payback to the present administration for their appointments? it seems that this rally is being driven in the futures markets (the tail wagging the dog) and the buy programs are being initiated to arbitrate stock prices upward in a vicious cycle. Or is this just my conspiratorial mind in overdrive? The fed buys the paper, and thereby floods the market with liquidity. that liquidity finds its way to the futures market and then to the stock market. Could the treasurer call the boys in NYC to sell distillate futures and buy s&P futures (knowing that the market was poised for a possible short squeeze) ? Or is this just too farfetched?

Posted by: MelvinBeiler | Oct 29, 2006 10:16:27 AM

The comments to this entry are closed.



Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      

Archives

Complete Archives List

Blogroll

Blogroll

Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:


Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites

FeedBurner


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo

Disclaimer

Disclaimer

Odds & Ends

Site by Moxie Design Studios™

FeedBurner