Here is what we know about active management:

  • Active Managment is expensive

The average expense ratio of actively managed funds is 1.29% vs. an average of .80% for all passive funds.

  • Active Management doesn’t consistently work well

Over the last 5 years (2009 – 2013), only 39% of U.S. Equity funds and 29% of International funds outperformed their benchmarks.(2)

  • In those rare instances when Active Management works, it rarely lasts

Over the last five years (through March), only 2 out of 2,862 active U.S. Equity funds stayed in the top quartile of performance in each of the last 5 years. That’s right 2 funds!(3) The other 99.93 % might have enjoyed a good year or two of performance but were unable to produce consistently good performance. And by the way, 852 of those funds (or 30%) merged with other funds or went out of business.(4)

  • You’d get better results flipping a coin

While we don’t recommend coin flipping, roulette or other games of luck as an investment strategy, pure chance would suggest that at least 3 funds (instead of 2) should have achieved consistent outperformance over the last 5 years.(5)

There may be great active money managers out there, but the data suggests they are few and far between and they have a very hard time remaining great.

In order to give yourself the highest probability of meeting your long-term financial goals, you should create a prudent financial plan based on your investment profile instead of gambling on the uncertainties and typically poor track record of active managers.

And if you are managing money yourself, it might be time for a reality check. Considering the study cited above, chances are you are doing at least as badly as the average active manager.

Beating the market is tough, but given the significant long-term growth of markets around the world (6), is it a smart idea to even try?

Focus on what you can control, your cash flow and overall planning.


J. William G. Chettle
2S&P Indices Versus Active Funds (SPIVA®) U.S. Scorecard, Year-End 2013
3Does Past Performance Matter? The Persistence Scorecard, S&P Down Jones Indices, June 2014
6Morningstar 2014