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Don't Be Tempted By The Lure Of Active Management - Part 2

Seth Jentner10/22/2014

Last week, we reviewed the uphill challenge active money managers face as they attempt to beat the market through research, analysis and various sophisticated trading techniques. Click here to read that post.

Each year, the Standard and Poor’s company collects the investment returns of investment managers and compares their returns with the benchmark index that represents the market the investment manager is trying to beat. Virtually every year, the markets, as represented by various indices, beat the majority of professional money managers! How can this be? Aren’t we paying these managers good money to beat the markets?

Over the years, I have volunteered on various endowment and foundation investment committees. Every year, we would invite the investment managers to explain how they performed. A majority of the time, these managers would admit they did not beat the benchmark index they were trying to beat, but they would proceed to explain what they were doing to turn this around. Occasionally, they would beat the market index but not all that often.

Is there a lesson to be learned from this? I believe there is.

Have you ever considered investing in index funds rather than actively managed investment funds? These index mutual funds and exchange traded funds do not try to beat the market. They simply purchase the investments of a particular index, with no judgment of which companies they like or don’t like. They deliver whatever the market returns, whether positive or negative, less a very small management fee. These index fund investments are transparent, low-cost, diversified, and mimic the market index return.

The result? They usually perform better than their actively managed cousins who are trying to beat the market. This reduces the potential dangers and risks of selecting the wrong stocks and bonds. The investor can focus on making an appropriate investment allocation, rather than trying to pick the so-called “best” securities.

To learn more about indexing, give us a call.

For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s newest white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.