Active vs. Passive Funds Debate: Don’t Worry, Be Happy

mrworryA common theme in the financial media these days is that “index funds will take over the world armageddon gaaaaahhhh”. People have already used the “bubble” label. Here’s an example of how three charts on the same topic can suggest very different things. First, you’ve probably seen charts like this that encourage you to extrapolate the current upward trend forever…

activefund0

How about some context? Yes, passive funds are gaining assets, but there is still a ton of money in active funds:

activefund1

Now, what if things are more cyclical? You know, stuff that goes both up and down? Here’s a chart from the Longleaf 2017 Q2 Shareholder letter:

activefund2

The active/passive debate is not new. As the chart [above] shows, performance runs in cycles, and active management is at a low point today. Late in the passive cycle, active investing typically has been declared dead. That declaration has been followed by a strong active management comeback with corresponding disappointment for those who capitulated and owned the index, particularly at its most inflated levels.

In the end, shouldn’t there be a balance? If things get too wacky, then the active stock managers should eventually have easy-pickins and make lots of money on the “dumb” indexers. My guess is that when the market goes down, active funds will get some of their mojo back. Overall, this topic remains in my “not gonna worry about it” folder.

Comments

  1. It’s probably best for most people to be in passive index funds like the S&P 500. That way they keep their costs low and take advantage of the historical 10% annual return (including dividends) of the market. For active fund I have the Contrafund from Fidelity which has been around a long time with the same manager.

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