Active Management or Active Hype?

Well, the market must be up, we’re seeing it again.  It’s all over the TV, radio, and popular financial press, that you can easily identify the Active Mutual Funds that far and away outperform the Passive Mutual Funds. The temptation being?  All you have to do is study the active fund manager’s past performance and invest before the market goes up, but nothing could be further from the truth.

According to Goldman Sachs Global Investment Research, 88% of hedge funds, 80% of large cap value, 65% of large cap core, and 67% of small cap mutual funds underperformed their index in 2012.  All of these are actively managed.

According to the Center for Research in Security Prices (CRSP), 79.51% of active equity mutual fund managers failed to beat their index for the 10 years ending in 2011.

The active strategy just doesn’t work.

Generally, active fund managers select investments by analyzing companies and projecting their findings into the future.  What they cannot account for is the effect that tomorrow’s unknowable and unpredictable news will have on a company’s performance and stock price.  All of this analysis and projection costs money, which is one of the reasons why you pay more to purchase active funds than you do passive funds.

Passive managers generally do not pick stocks that someone thinks will do well in the future.  They do not chase last year’s winners, and they do not try to “time the market” by guessing when to get in and when to get out.

We are proponents of a form of passive investing that we call the Structured Academic Approach.  Our clients’ portfolios, on average, contain almost 13,000 unique holdings, allocated among at least 13 different asset classes and 44 different free-market economies.

But, strange as it seems, active managers often act as if free markets don’t work. Free markets are uninhibited markets where a stock is worth what a buyer is willing to buy it for, and what a seller is willing to sell it for.  Active managers hope to find a stock that has escaped the reality of the free markets, so that they can make a profit.  Sure, there will be winners along with the losers, but doesn’t this resemble gambling and speculating more than it resembles prudent investing?

It has been shown time and time again that free markets work.  Therefore, we consciously do not have any actively managed mutual funds in our investment portfolios. Why pay for turnover and redundancy, i.e. needless transactions under the guise of prudence.

Here is a video we posted on YouTube a few years ago, the industry still want to imply they have the answers.

About Paul Nichols

Paul is the founder of Financial Abundance, a Registered Investor Advisory firm and EDI, an Estate Planning Firm with offices in State College and Lewisburg. He has been working with individuals, families and businesses for over twenty years, including many Fortune 500 companies. He has educated tens of thousands of people through seminars, workshops and various international speaking engagements where he shared the stage with many notable individuals such as Ronald Reagan, Robert Kiyosaki (author of Rich Dad, Poor Dad), Mike Ditka, General Schwarzkopf, and Newt Gingrich to name a few.

In 2000, after many years of traveling to consult companies and individuals, Paul decided to relocate from Colorado to State College, PA (his wife’s hometown) to develop a local advisory firm.

Paul operates under the core belief that education plus understanding leads to clarity and confidence; resulting in peace of mind. He is a proud father of three and devoted husband of 20 plus years.

Some of Paul’s accomplishments:
Regular contributor to the Centre Daily Times, via the “It’s Your Money” blog
Featured in the movie Navigating the Fog of Investing
Regular contributor to Town & Gown as the publications Investor Coach
Host of the weekly iTunes Podcast, It’s Your Money
Member of the Western PA Better Business Bureau
Member of the Centre County Chamber of Business and Industry