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Top 10 Investor Errors: Passive vs Active Management

Posted By Barry Ritholtz On July 4, 2012 @ 10:00 am In Apprenticed Investor,Investing,Rules | Comments Disabled

This is post number five in our series, bringing us exactly halfway through our ongoing look at the most common investor errors.

This morning, we are going to briefly look at what may very well be the most common mistake investors make: Being active investors.

Passive vs Active Management

Active fund management – the attempt by an investor or manager to try to outperform their benchmarks through superior stock picking and/or market timing – is exceedingly difficult. It has been shown (repeatedly) that every year, 80% of active managers under-perform their benchmarks.

Those are not particularly attractive odds.

Worse, most active managers typically run higher-fee funds. (all that activity costs money!). That combination — High Fees + Under-performance — are not the ingredients of a winning long-term strategy. This is why for the vast majority of investors, passive index investing is a superior approach.

Why? You:

-Remove the emotional component
-Take advantage of (instead of working against) mean reversion
-Garner the lowest possible fees
-Eliminate all of the friction caused by overtrading
-Keep capital gains taxes as low as possible
-Get good results over the entire long cycle
-Avoids typical cognitive errors
-Stop chasing hot managers and funds

 

Consider if your portfolio won’t be better served replacing some or all of your active fund managers with passive indices.

 

 

Previously:
Top 10 Investor Errors
1. Excess Fees [1]
2. Reaching for Yield [2]
3. You Are Your Own Worst Enemy [3]
4. Asset Allocation vs Stock Picking [4]

 

Top 10 Investor Errors
1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Asset Allocation Matters More than Stock Picking
5. Passive vs Active Management
6. Mutual Fund vs ETFs
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2012/07/top-10-investor-errors-passive-vs-active-management/

URLs in this post:

[1] Excess Fees: http://www.ritholtz.com/blog../2012/06/top-10-investor-errors-fees/

[2] Reaching for Yield: http://www.ritholtz.com/blog../2012/07/top-10-investor-errors-reaching-for-yield/

[3] You Are Your Own Worst Enemy: http://www.ritholtz.com/blog/2012/07/top-10-investor-errors-you-are-your-own-worst-enemy/

[4] Asset Allocation vs Stock Picking: http://www.ritholtz.com/blog/2012/07/asset-allocation-vs-stock-picking/

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