Large-Cap Investing – Investing Forever Advisory

Passive is the New Aggressive (Part 8)

Jack Bogle, the father of the index fund, passed away on January 16, 2019, and over his career Bogle pioneered the philosophy of passive investing for the common investor.
Bogle founded and built The Vanguard Group into the world’s largest mutual fund company, with over five trillion in assets under management (AUM). Continue reading → Passive is the New Aggressive (Part 8)

Research suggests that less than one percent of professional active manages are “skilled” at what they do.
Given this, the odds of picking a solid active manager is not just slightly worse than a coin toss; in fact, the chances are closer to slim to none.
Therefore, a passive investing strategy may be more sensible over the long run for most investors.

The fee differential between active and passive mutual funds may not appear to be significant at first sight.
However, over long periods, the impact of higher fees associated with active investing through mutual funds can be considerable, as compared to passive alternatives.
As such, over an investment lifetime of 45 years, excessive fees could wipe out a large percentage of your potential wealth.
Therefore, going with a passive approach has the potential to mitigate this particular concern.

Higher fees tend to correlate with worse investment performance, as suggested by research from Vanguard based upon the historical analysis of active and passive large-cap mutual funds.
Research suggests that the lower the fees, the less likely that a fund will underperform its benchmark (which is good for the investor).
Sound investing comes down to being able to differentiate between what you can control and what you can’t, and then doing your best to focus on the former while still maintaining a solid understanding the risks associated with the latter.
Given that you can control how much you pay in fees, but not whether a fund will outperform, a passive approach has strong merit over an active one.

There may be strong psychological reasons why financial firms can command such high fees.
Ultimately, these high fees can lead to the systematic transfer of wealth away from investors’ pockets.
The Efficient Market Hypothesis suggests that actively invested mutual funds face an impossible challenge in outperforming their passively invested counterparts.
Nevertheless, the fees for actively managed funds are much higher than those of passively managed funds.