Rethinking an All-Passive Strategy

Human beings prefer simple answers. This is true in virtually all endeavors in life from politics, to medicine and is especially true in investing. However, investing is not simple and taking the simple way out can be costly in the long run.

Take for example the ongoing debate of passive versus active investing. The incredible growth of index funds leads some to think there is no debate and that passive, index investing is the only way to invest. While it is true that most active funds do not beat the market, that does not mean that there are not funds that do beat the market, in fact there are many funds that beat the market and over very long periods of time.

If you need a complete wake-up call to prove that passive versus active is not a “done deal”, simply ask yourself then why does the first and largest index fund manager, Vanguard have any active funds? They too have many and in fact recently are going into alternative investing including private equity. Clearly, they see that active management has merit.

Famed Fidelity portfolio manager Peter Lynch in a talk on Bloomberg Radio states that “The move to passive is a mistake”. He references three current Fidelity managers that have been beating the market for quite some time, including one for over 30 years. Lynch became famous for his eye-popping annual performance of 29% over a 13-year tenure running the Magellan fund.

The Fidelity Contra Fund for example, continues to beat the market over very long period of time, according to both firm material and fund research firm Morningstar. This of course is not the only fund to beat the market. According to Investors Business Daily, 25% of all funds have beat the market, or more specifically their chosen index. This fact contradicts the passive-only argument that it is impossible to beat the market.

There are several fund-screening services available for investors to do their own searches, including Morningstar, Zacks, Value Line as well as most brokerage firms have investment screeners. Perhaps the best way to determine which long term well-performing funds should be considered for your portfolio is a financial advisor. An advisor is adept at looking at many metrics of fit including cost, risk, long term performance and integrating it into your household’s total financial picture.

History does teach us that by resisting the temptations of simplicity, significant returns can result.

Related: Understand the Limitations of Zero Commissions and Fractional Shares