Stock picking doesn’t work, but vested players keep on promoting it

A recent article in Barron’s, a weekly investment publication, concludes that technology and regulatory reform have made active investing obsolete. Active investing, for those not into market lingo, means the constant search for stocks or industry sectors that will beat the market.

The article is no surprise (academic researchers have long concluded that active managers can’t beat the market), but its appearance in Barron’s is unusual, given that the old-line weekly concentrates on stories about individual stocks or investment sectors.

But it acknowledges what has long been an open secret: since the turn of the century, there have been no five-year periods when active investment managers have beaten market indexes. “Active investment managers” in this sense are the thousands of mutual fund managers who run stock and bond portfolios.

The article notes that Standard & Poor’s, which began comparing the results of its indexes to active management results at the turn of the century has shown that active managers of all types of mutual funds had fallen behind the indexes over the last 15 years.

So who still promotes active investment management and why? That’s easy, the article says: mutual fund managers, stockbrokers, bankers, pension and endowment fund managers, and others “do not want to give up their profitable economic niche without a fight.”

In other words, it is still highly profitable to charge investors to manage a portfolio, so the big stock brokerages and mutual fund managers will continue to do so and argue that they add value to the investment process. “Together, they are getting paid tens of billions of dollars each year to service the active-management community,” Barron’s said.

Level Financial Advisors, incidentally, has long been convinced that active investment management does not pay. We use mainly low-cost passive investment strategies offered by Dimensional Fund Advisors (DFA), Vanguard, and others.

Richard Schroeder, CFP®
Chief Investment Officer



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