Active investment management involves the use of investment managers and research staff to produce investment ideas and strategies that try to beat the market. Ironically, everyone seems to think they are better than average but, mathematically we know that this cannot be true for the aggregate invested dollar.
All active managers think they will beat the market.
All active managers cannot beat the market - a mathematical truth, since all active investors collectively ARE the market.
So how do you choose the ones who do? Advertising campaigns will lead you to believe that it is based on previous track records, but securities regulators require all mutual fund companies to clearly indicate in the disclaimers that past performance is not indicative of future performance.
Proponents of active management will cite Warren Buffett as an example of how active management works. However, most of these proponents do not own Berkshire Hathaway stock (Buffett's investment management fund), nor do they follow his investment rules. Warren Buffett makes only a few investment transactions per year, whereas some actively managed mutual fund portfolios make hundreds.
Standard & Poor's releases a quarterly scorecard that measures the performance of active mutual fund managers against their benchmark indices. This report is known as the SPIVA Scorecard (Standard & Poor's Index Versus Active scorecard). Every quarter the statistics are updated and for short term periods, sometimes active managers win on average, and sometimes the indices win on average. But as you move towards longer time periods (such as 5 years), only around 10% of active managers tend to have beaten their benchmarks in broad domestic markets.
Click here for the latest SPIVA Scorecard to see for yourself. The results may surprise you.
If you would like to compare your mutual funds to the Fundamental Index, just click here to access our free tool. (Password: 'profinancial')
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