We’ve discussed active versus passive investing at length in this blog. For those that might not be familiar with the difference, active investing is where a manager or investor attempts to pick investments that will beat a benchmark or relevant index while passive investing is where a manager or investor attempts to match benchmark or index performance through some sort of replication strategy.
Numerous studies and statistics exist demonstrating the vast majority of active stock investment managers underperform their respective benchmarks on a net of fee basis, appearing to bolster the case for passive investing. That’s not to say there isn’t room for active investing strategies in a portfolio but they probably shouldn’t be the core element of a portfolio.
I came across the chart below from Societe Generale via the WSJ’s Daily Shot last week. The chart displays the percentage of global stocks (universe of 16,000) outperforming the S&P 500. The percentage has been below 50% since 2011 and is less than 40% in the most current reading. As recently as 2018, the percentage was around 20%.
The odds don’t appear to be very favorable for stock-picking. Furthermore, we don’t know the average outperformance and what that might look like on an after fee basis. Once again, the evidence appears to favor passive investing over active investing strategies on the whole. Again that’s not to say there’s no place for active investing strategies in a portfolio or that active strategies won’t eventually stage a comeback. However, since investing is a “loser’s game” an investor’s objective should be to minimize errors and to maximize the odds for favorable outcomes by sticking with proven investment principles and practices.