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Conservative Wealth Management LLC
Registered Investment Advisor
Phil DeMuth, Ph.D

E-mail: Phil DeMuth
Tel: 323 876 3300

     
 

The Joy of Passive Investing

Sooner or later, most serious investors give up on active management. The reason is simple: it fails to add utility. Neither clever stock picking nor short-swing market timing prove to add value after expenses.

As Dr. Bernstein says, "Indexes will beat three-quarters of active managers. If you look at a global portfolio, if you actively manage each of 10 asset classes, chances are you'll lose. To win in one asset class, you can be lucky and beat the index. But if you're an investor, you need to beat the benchmark in at least seven or eight of the asset classes if you're investing in 10 to 15 asset classes. The chances of doing that are close to zero."

According to a study by FundExpenses.com, from 1998 through 2002 mutual fund investors spent $120,000,000,000 on active stock picking expertise that lost them in aggregate 34% of their money.

The following table from John Bogle shows how much your performance improves by owning a simple S&P 500 Index fund vs. the average actively-managed mutual fund from 1980-2005.

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After inflation and expenses, the S&P 500 investor earned 9% annually, versus just 4% for the typical actively-managed fund investor.

 

 

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