What should you know?
Investment funds tend to fall into two broad categories, active, and passive.
Active funds: These employ a team of investment managers to make decisions about which assets (eg stocks and bonds) to hold within the fund’s portfolio. The goal of an active investment fund is to try to outperform the broader market.
Active funds typically charge 1-2% per year in investment manager fees, though they can be considerably higher.
Passive Funds: These aim to replicate the performance of a specific market or index. No active decision making takes place, the portfolio simply mirrors the composition and returns of the market or index that it follows.
Passive funds usually have much lower fees – funds that tracked an index charged just 0.12% on average in 2022.
The chart below shows the performance of actively managed funds against their benchmarks. it covers all the main US equity market segments as well as Real Estate, over different time frames:
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- The majority of actively managed funds were unable to beat their benchmark. The longer the time frame, the higher the chance of underperformance.
- Even over the shortest period of 1 year, only one sector (‘small cap value’) could boast more than 50% of funds that beat the market average.
- Over a 20-year period, less than 10% of all actively managed funds were able to beat the market.
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Why should you care?
An actively managed fund may be able to beat the market SOME of the time, but very very few are able to beat the market ALL of the time. Choosing the top-performing funds in advance is an almost impossible task.
When you consider that the fees for actively managed funds are around 10x higher than for passive funds, you can start to understand why so few are able to outperform passive funds on a consistent basis.
As Jack Bogle, founder of the Vanguard group, said “Don’t look for the needle in the haystack, just buy the haystack!”
Buying the whole market by investing in a globally diversified portfolio of low-cost passive funds, and staying invested for the long-term, has been proven to be the most reliable pathway to investing success.
