Active vs. Passive Investing: Part 4 |

Section Four of the Active vs. Passive paper is long, stretching over two pages.? If I were to quickly summarize pages 5 and 6 it would go like this ? stay away from actively managed mutual funds and buy index mutual funds or non-managed index ETFs.? The author accurately points out the high costs of managing a mutual fund that involves active management.? He starts this section of the paper with this argument, and I quote.

"Most often the only real argument to support the superior returns of passive indexing comes from a comparison of returns between high-fee active mutual funds and low-cost index funds (or ETFs).? This argument's use of mutual funds is invalid on man levels."

It sure is not the fault of "passive investors" if they choose to keep costs down.? The fact that actively managed mutual funds put the investor behind an index by 100 to 200 basis points (annually) right out of the starting blocks is reason enough to stay away from them.? Actively managed mutual funds scarfed enough money from me to last a lifetime.? No more.

Assuming you have the "no-name" active vs. paper in your hands, examine the a through j reasons for avoiding actively managed mutual funds.? Considering these funds are managed by professionals, is it unreasonable to extrapolate many of the negatives to small active individual investors?? Granted, many of the constraints listed in Sector Four are not imposed on the independent investor.

Points a and c of Section Four focus on costs.? Any costs to operating a portfolio subtracts from the bottom line.? There are costs involved in active management, although they can be reduced if one is a long-term investor and the active manager uses a discount broker.? Day traders eat up profits through commissions and taxes.

Point b applies to finding a mutual fund manager or an individual to manage your account.? If you are seeking a manager or advisor, assume your costs will run between 40 and 100 basis points times the value of the account.? Ninety (90) basis of a $100,000 account will run $900 per year.? That sums to a non-trivial amount over a lifetime of investing.

The author concludes Secton Four with this statement.

"The only possible conclusion is that mutual funds cannot be used in the determination of the issue 'does passive investing outperform active management?'? There are just too many non-strategy attributes that distort their results."? While this may be true, where is the evidence that active management out performs passive management.

When Benjamin was asked the question, "Can the average manager of institutional funds obtain better results than the Dow Jones Industrial Average or the Standard & Poor's Index over the years?? he elequently answered,? "No. In effect, that would mean that the stock market experts as a whole could beat themselves?a logical contradiction."?

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Source: http://itawealthmanagement.com/2012/02/06/active-vs-passive-investing-part-4/

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