A remarkable 54-minute UK film featuring some of the world’s top economists and academics and demonstrating:

* how the claims of active fund managers to be able to beat the market are largely a myth
* how costs are the biggest drag on performance – and why active costs more
* how passive investing offers the best experience for the vast majority of investors
* the benefits of a diversified portfolio in guaranteeing consistent returns
* why passive investing is better for your health
* why active investing has held sway for so many years….
* … but why things may be changing
* and why passive is the rational, mathematically proven route to investing success.



Passive Investing: The Evidence the Fund Management Industry Would Prefer You Not to See

Published on Nov 29, 2012


Hat tip Josh at TRB


Sensibleinvesting.tv The independent voice of passive investing

Investing for the future… It’s an issue none of can afford to ignore.

No one’s job is safe these days… How would you cope if you lost yours?

We’re all living longer too… So are you saving enough to fund 25 years or more of retirement?

Can you really afford to pay for your children or grandchildren to go to university – or help them onto the property ladder?

And what about all those holidays you promised yourself?

We entrust the vast bulk of our investments to fund managers.

Here in the UK, according to Her Majesty’s Treasury, the industry has more than four TRILLION pounds of investors’ money under management.

Fund managers invest people’s savings wherever they see fit – mainly in equities, or shares in listed companies.

They claim to be experts at making our making grow, using their expert knowledge to pick the shares that will outperform the market.

But all too often the returns they produce are considerably lower than the average return of a benchmark index like the FTSE 100 – or the S&P 500 in the States.

For veteran investment guru John Bogle, the problem is simple. Fund managers just aren’t as smart as they like to think they are.

As it means trading against the view of numerous market participants with superior information, buying or selling a security is effectively just a bet. So, whilst your fund manager might lead you to believe it’s his knowledge or intelligence that enables you to beat the market, he’s really no better than a gambler.

So, you might be lucky enough to choose the right fund manager. But you could just as easily pick the wrong one.

According to the financial services company Bestinvest, there are currently nearly £10 billion of UK investors’ money languishing in what it calls dog funds – in other words, funds which have underperperformed their benchmark index for at least three consecutive years.

Ultimately, of course, fund managers are businesses. They exist to make money for themselves. They want our business – even if it means persuading us to invest in a fund which they themselves wouldn’t want to put their own money in.

It’s now time to look at what it actually costs us to invest.

Fund managers are, of course, businesses. And, like all business, they have overheads.

Running a big fund management company doesn’t come cheap – especially when top managers earn around £2 million a year, including bonuses. And remember, it’s you, the customer, who picks up the tab.

Ultimately, though, fund managers need to make a profit. In fact they’re making around £10 billion from us every year – and that’s regardless of whether or not they manage to produce a profit for us.

Part of the challenge is working out exactly what we are being charged. Investors typically use something called the annual Total Expense Ratio, or TER, to compare the cost of investing in different funds. But, the TER excludes dealing commission, stamp duty and other turnover costs that can add considerably to the expense of investing over time.

So, apart from those hidden charges, what else are we having to pay? More importantly, what sort of impact do charges have on the value of our investments? And the bad news doesn’t stop there. Despite a marked increase in competition, management charges in the UK have been steadily rising over the last ten years.

There are some encouraging signs for consumers. The FSA’s Retail Distribution Review will require fund managers to be fairer and more transparent when it comes to charges. In the meantime, investors should be on their guard.

For more videos like this one, visit http://sensibleinvesting.tv

Category: Investing, Video

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Passive Investing: What Wall Street Prefers You Not Know”

  1. TARBIOTECH says:

    I have a question Barry. Many companies offer a long list of funds in their 401k. A lot do not
    offer a simple index fund (Vanguard). From an ethical perspective this is B.S.. What about from a fiduciary responsibility perspective? I know I am swimming against the crowd in that I think the 401k is quite possibly the greatest scam perpetrated on the working public…….we’ll see in 20 years…..

  2. Fredex says:

    I’ve been a Vanguard index investor since the early 80s. When I retired last year, I took my pension as a lump sum and rolled that into an existing Vanguard IRA. One nest egg, one nest.

    I read Barry for laughs.

  3. A says:

    I know a LOT of people who should take the time to watch this. Well done.
    No, there’s not a lot that’s new – in fact, the same message has been shared 100′s of times.
    Sadly, too many people choose to remain ignorant.

    The financial industry has a little secret that it normally shares behind closed doors:
    Consumer ignorance, is highly profitable.

  4. farmera1 says:

    Bogle looks really bad and old, sorry to see that, I consider him one of the really great ones that has a lot to teach other people. Bogle is worth listening to.

    Great video. Well worth sitting through the whole 50+ minutes. The points made in the video are valid, and most of us learn this late in our life after many years of trying to roll the bolder up the hill. This could be a short cut for younger investors, if they choose to listen.

  5. [...] Passive Investing: What Wall Street Prefers You Not Know | The Big … [...]

  6. steve says:

    Another round in the “The Great Stock Market Debate” http://www.youtube.com/watch?v=qeJSwrWdbLs

    Is the UK film really against active management or against active mutual funds?

    I went to cash in October 1999 when the SPY was 135. Today SPY is 155, only 14% higher 13 years later. However, my account is up four fold.

    Yes, fees are are major drag on an investor’s account but so is riding your account down through a bear market draw down while sitting there and doing nothing. Also, how much damage does that do to an investor’s health and well being?

    You need to got to get the major turning points right. That’s why I read ritholtz.com !! http://www.ritholtz.com/blog/major-market-calls/

    Barry, thanks for your daily hard work and continued efforts to enlighten your readers.


    • wally says:

      “You need to got to get the major turning points right.”

      That’s the thinking… but make a list of all the brilliant, highly-paid full time, professional, well-researched persons who have managed to do that even two or three times in a row. The list will exactly statistically match what would be expected of random guessers. There will always be somebody who made the ‘best’ call – but that’s just a mathematical fact, not a proof that somebody knew the future. These ‘best’ calls are only discovered after the fact, then are painted with the aura of superiority. All the ‘best’ calls that turn out to be wrong are simply ignored, quietly forgotten, conveniently put out of mind.

      Remember, too, that even bits like that presentation on passive investing are still basically equity-centric. That is in itself a lack of diversification. Go down a list of 40 or 50 of the world’s wealthiest persons and see how many made their fortunes in equity investing. Virtually none.

      • steve says:

        I agree there are lots of “pros” milking a good market call for publicity purposes.

        Actually I was not bragging about my Oct 1999 call. I was 5 months too early!
        (although I was bragging about my account being up four-fold since.)

        The real point was that the SPY was ONLY up 14% since. The day I liquidated, I looked at SPY and remembered the price since I thought I was making a mistake by going against the market wisdom/folklore about buy and hold passive investing.


        BR: From October 1999 to March 2000, the Nasdaq doubled, rallying from 2500 to over 5100! Helluva 5 months to miss