I wrote many times already about this subject on this blog. I even wrote my University thesis about this topic back in 1992. Unfortunately, it is a fact: Active Money managers, with very rare exceptions, underperform their benchmark index.
Why? Here are the answers:
1. Active managers can’t overcome the headwind of higher fees.
2. Active managers don’t pick better stocks.
3. Active managers can’t time the markets.
What should a small then do?
The S&P 500 Index outperformed 90% of all active Money Managers in a period of 10 years. So, one way is to by a simple inactive S&P 500 index fund and if held over a period of 10 years, you, the small investor will be a top 10% money manager!!!
But there is an even better, systematic way for the small, private investor that can beat Mr. Market by an average of 1% to 2% each year: Invest in ETFs that buy stocks based on time-tested factors: growth, value, momentum or even insider buying.
That small outperformance of 1% to 2%, compounded over time, adds up to a huge difference.
Sven Franssen