What if I told you that if you put your money into an S&P 500 index fund and didn’t touch it for 9 years – you would still come out ahead of where you would otherwise be, if you had paid a fancy wealth manager to actively invest the money for you?
It’s true.
Passive vs. Active Investing
Active managers have historically performed worse than the S&P 500 – for the last nine years and counting. From 2009 to 2019, “hedge funds earned an annualized return of 6.09% compared to 15.82 for the S&P 500.”
Even Warren Buffet agrees. Back in 2007, Buffet famously bet a massive hedge fund, Protégé Partners, that the Vanguard 500 Index Fund Admiral Shares, an S&P 500 Index fund, would yield higher returns over a [10 year] period, than a basket stocks chosen by Protégé. When the bet came due in 2017, the numbers didn’t lie; the Vanguard fund returns destroyed the Protégé stocks, 7.1% to 2.2%. Passive investing beat active investing, hand over first.
This is great news for all us lazy people. If you feel bad that you don’t have enough time to scour the internets for stock tips and day trade, don’t; history favors investing in an index fund or ETF and then doing absolutely nothing. Pretend your money is like a rotisserie chicken; for best results, “set it forget it.”
How Do Active Managers Have Jobs?
Given that active investors historically underperform passive investing, how do these people even have jobs? Why would anyone in their right mind pay a management fee to get a worse return?
The one “upper hand” an active investor might have is that they can buck market trends by cherry-picking stocks to buy and sell. Passive investing only beats active investing if we assume that the market goes up as a whole over time (which it has, historically). If the market goes down over time, an ETF or an index fund will go down too.
But a shrewd active investor that picks the right stocks to buy and sell can potentially perform well during a downturn. And people are willing to accept lower yearly returns from active investors (versus passive investing) in order to hedge against a downturn. Of course, not all active investors will outperform the market during the downturn. Which ones have that “Midas touch” is anyone’s guess.
Tony Robbins
Not to bring Tony Robbins into this, but to bring Tony Robbins into this, even Tony, who awakens giants before he even gets out of bed, takes a passive approach when it comes to his own finances. “When you own an index fund, you’re also protected against all the downright dumb, mildly misguided or merely unlucky decisions that active fund managers are liable to make.”
If Tony picks an ETF and does nothing, shouldn’t you?