Active vs. Indexing: Facts and Fiction

by | Sep 7, 2017 | Investment Discipline

Active vs. Passive (Index): Separating Fact from Fiction

The odds of trying to beat the market with actively managed mutual funds is a losing game that will cost you money. Academics, practitioners, and the mutual fund rating services have long studied how active mutual funds perform against market indices. The unbiased evidence over the past 90 years is consistent and shows 65%-70% of active funds lose against their index. When all factors are weighed the losing ratio can rise to 85%-90%.1Vanguard, Standard & Poor’s Not good odds! The conclusion of these facts is irrefutable:

Active funds add cost and risk. It’s a business that doesn’t pay… the investor, that is.

Savvy, informed investors such as Warren Buffet, Peter Lynch, and David Swenson know these facts. You should too! Hence, we present studies and commentaries to help you understand why the use of active funds decreases your odds for long-term, compound value creation.

Performance Studies: Summary Conclusions (1928-Present)

1. The Odds: active funds loss-win ratio of 2:1 (65%-70% losing proposition) recurs across different time periods, regions, and asset classes. Investment costs are the biggest culprit; after adjusting for survivor bias, sales loads, risk, and taxes this losing proposition rises to 85%-90%!
2. The Payout: winning funds won by 0.96%, losing funds fell 1.69%; winning funds should have won by 3.38% to compensate for the risk of gambling to beat the market.2Vanguard 1984-2009 study
3. A Winner: probably not. Winning funds seldom persist; yesterday’s winners are tomorrow’s losers. Managers may outperform an index over 3, 5, or maybe even 10 years. However, it’s rare and the data show it’s very probable that periods of outperformance revert to future underperformance.

Cost and Compounding: When 1% = 15%, 20%, 32%……..

The table shows how much less money you would have for a 1.0% difference in return. The point is that a seeming small annual cost difference compounds with time into large dollar amounts, leaving much less for your goals. 1% on top of 1% on top of 1% on top of 1% etc. becomes exponential.


Jerry Matecun – Founder, President
Expert guidance to plan your future, preserve your lifestyle, and retire with confidence. For a confidential consult, contact me at


  • 1
    Vanguard, Standard & Poor’s
  • 2
    Vanguard 1984-2009 study

Advice that Matters for business & personal financial insights