Whether it’s sports, music or politics, life holds any number of “great debates” that never seem to reach a conclusion. In investments, that great debate asks the question, “Active or passive investing: Which is better?”
The fascinating aspect of this debate is that equally intelligent people can argue polar opposite positions, leaving the rest of us to wonder what the answer is—if one even exists.
The case for passive management is anchored in the evidence that the preponderance of money managers have failed consistently to beat their comparative index. This, the argument goes, is true for two primary reasons:
Active managers counter that, while the markets may be generally efficient, there are windows of inefficiency created by the time it takes for information to be properly reflected in a stock’s price.
Active managers further argue that performance is not just about relative return, but also about managing risk. For instance, if an active manager can deliver a hypothetical 90% of the index return at 70% of its risk, then that constitutes a measured outperformance.²
Ultimately, it’s a decision based on what you want to pursue. Do you prefer the approach taken by index funds or the strategy behind active management? For some, the combination of both methods represents an approach that takes no sides but seeks to tap into the distinctive benefits each offers.
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