Investment decisions should be based on empirical data and modern financial science. Modern Portfolio Theory and the Efficient Markets Hypothesis, informed by nearly a century of market information, show that a passive investment approach that shuns market timing and individual stock picking gives an investor the best chance of capturing market returns. Too often, however, investors, not content with “being average” and lured by the hope of beating the market, ignore science and place bets on a particular manager whom they feel will outperform.
Time and again, the research shows that active management fails to consistently deliver on the hope of outperformance. Even when some managers do outperform, they are in the minority and their success does not persist into the future. Markets are just too efficient and the costs of active management too much of a drag on performance for active managers to yield consistent returns in excess of market averages. The clear conclusion is that pursuing a passive strategy is the most prudent approach given the scientific evidence and the teachings of modern finance. Our firm embraces this approach and adheres to a passive strategy when constructing investment portfolios for our clients.
The following is a report recently published by DFA that reviews the performance of active mutual funds over a 10 year period. The results point out yet again the failure of active management across all markets and in both equities and fixed income. I think you will find the presentation compelling and will come away even more convinced in the soundness of the passive investment approach we follow.