Friday, March 11, 2016

Even if Active Investing Doesn't Pay, We Need It

Fewer than one of five actively managed equity mutual funds did better than comparable index funds over the past ten years. Although results over shorter periods weren't quite so bad. the majority of actively managed funds underperformed. As a result, Jason Swieg reports in the WSJ, some fund managers have thrown in the towel. They're buying a few ETFs rather than assembling portfolios of stocks.

Meanwhile, investors continue flocking to index funds.  Yet as a Cullen Roche column points out, all investors cannot do nothing but index. Active investors and active investment managers are needed to keep the market honest. See also Is Passive Investment Actively Hurting the Economy in The New Yorker. (Are index funds really responsible for the higher fees charged by large banks?)

Inexpensive online investment services based on index funds seem destined to become the basic investment platform for millennials. Even so, as their wealth grows they might enjoy setting up a side account of shares in selected companies, They'll gain the sense of being actual stockholders. And despite returns likely to be sub par, they'll be performing a public service – doing their part to keep stock prices in line with business realities.

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