Active Investors vs. Passive Investors

Peter Lynch, the famous stock picker once said, “Most investors would be better off in an index fund.”  I wondered if this was true, so I set out to find the answer!  Do active investors make more money than passive investors?  First, let’s define the two types.  Active investing, or market timing, is a strategy that investors use when trying to beat the market or the benchmark returns they are measuring against.  They often base their investment choices on what investments outperformed the market last quarter or last year and end up chasing returns but never quite catching them.  Passive investing is choosing a mix of high quality low-cost index based funds to form a diversified portfolio and sticking with those choices through the market ups and downs.  This is commonly referred to as a “buy and hold” strategy.  So, which strategy is best? The 2014 Dalbar Study* tracked the rate of return of the average equity (stock) fund investor from 1984 to 2013.  They found that those investors earned returns of only 3.69% per year, while the S&P 500 returned 11.11%.  To put this into dollars, the average equity fund investment grew from $100,000 to $296,556, while the growth of the same investment in the S&P 500 was $2,358,275.  Active investors rely on speculation about short-term market movements.  These strategies increase their risk, expenses, taxes and not to mention anxiety!  When investing for the long term, it is crucial to look at how your investments are being managed and examine the underlying costs.  The value an experienced financial advisor can help create a cost-effective portfolio of investments with the appropriate asset allocation for your goals and risk tolerance.  Having an advisor has also been proven to help you stay disciplined when you’re feeling emotional about the stock market ups and downs and help prevent you from making panicky decisions.   
 

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Julia Carlson is a registered Principal with, and securities are offered through, LPL Financial.  Member FINRA/SIPC.  Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. 

• DALBAR’S 2014 Quantitative Analysis of Investor Behavior (QAIB) study examines real investor returns from equity, fixed income and money market mutual funds from January 1984 through December 2013. The study was originally conducted by DALBAR, Inc. In 1994 and was the first to investigate how mutual fund investors’ behavior affects the returns they actually earn.

Past performance is no guarantee of future results. Indexes cannot be invested into directly.