Stock Pickers Lose in the Long-Run
Every year I look forward to the release of the updated SPIVA report which lays out the facts on the passive vs active investment debate. I’ve read enough of these reports that I know what to expect with each release, but I consider reading them to be a beacon of sanity amongst the marketing efforts of investment managers and social media investment gurus who insist that they know the way to beat the market.
Active investment management is the selection of investments with the expectation that they will perform better than others and thus “beat the market”. Passive investing, on the other hand, simply aims to invest in a given market as a whole and keep fees low.
Why invest in something that doesn’t even try to beat the market? The investment industry has been so adamant in its drive to “beat the market” that not attempting to do the same can feel like accepting failure from the outset. The simple math in favour of passive investing has been known for years, but thanks to the S&P Indices Versus Active (SPIVA) Report, we’ve had evidence of the lacklustre results of mutual fund managers going back to 2002.
A very important feature of the SPIVA report is the correction of survivor bias. Investment companies typically offer many different investment funds, but close funds over time. The report shows that nearly 40% of equity funds across all categories closed over the 10-year period ending June 30, 2022. Funds will usually close after continued poor performance, thus removing the fund from the sight of new potential investors. This presents a rosier view of the current selection of mutual funds as the laggards have been quietly folded up.
One additional benefit that I personally receive from investing in passively managed investments is that I do not worry that I’ve picked a dud. I know that I’ve invested in the stock market as a whole, and while it will have ups and downs over time, in the long run, there is a good chance that the stock market will continue to increase in value as companies grow and become more productive.
For anyone wanting to learn more, I recommend the short book ‘The Little Book of Common Sense Investing’ by John Bogle as an excellent primer on passive investing.
There is also a good list of financial books compiled by Ben Mayhew of Aergo Financial Planning.
