Jan 20

The Results Are In – Active vs. Passive

by Patrick Rohe, CFP®

Most investors track the direction of the financial market by checking where the S&P 500 or Dow Jones Industrial Average finishes on a daily basis in their local paper.

Some days they were pleased with what they saw and others not, but as a whole 2010 left most investors optimistic about the direction of their retirement portfolios.  However, most people forget to check how their portfolio returns did relative to these numbers, and if they had, might think of changing advisors as a New Year’s resolution as well.

In 2010, a mere 25% of active managers beat their respective benchmarks, with many active managers calling it the “toughest year on record.”  High correlations between stocks, low spreads on returns, and tough economic times were their reasons for underperformance.  Nowhere did they mention that either high costs or lack of ability could have played into their lacking returns.  Better yet, only two-thirds of active managers plan to beat the S&P 500 next year, which leaves me wondering what the other third plan on getting paid for while going to work each day?

Upton Sinclair once said that “it’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it,” and this seems to be the case with active management as well.  The latest data from Standard and Poor’s shows that active managers continue to underperform and at a rate that is far worse than chance.

This underperformance by active managers is not unique to 2010, yet instead, it only gets worse when you look at it over the long run.  For the five years ending September 2010, only 4.1% of large-cap funds, 3.8% of mid-cap funds, and 4.6% of small-cap funds maintained a top-half ranking over five consecutive 12-month periods.  Statistically, 6.25% of funds would fit this criteria, assuming a 50% chance of falling into the top half each year.

This shows that not only have active managers underperformed their respective benchmarks in 2010, but that you have a better chance of picking which one will outperform its peers over a five-year period by blindly drawing a name from a hat!

So as you look back over 2010 and plan for another year, do yourself a favor and review your retirement portfolio.  It’s more important than you might think and can make a drastic impact on the way you spend your retirement years.  No individual wants to pay a premium for the likelihood of underperforming market returns, yet a majority of the populations does.

Take a moment this New Year and make sure you are not just following the crowd.  Though, for current Rockbridge clients, you can cross this one off and move to the next thing on your list of resolutions!

About the Author

Patrick Rohe CFP is a Certified Financial Planner at Rockbridge. “Upon graduation from Cornell University, I was recruited by a large brokerage firm. After months of sales training and minimal help in understanding even the basics of investing, I quickly learned that the brokerage firm model was not for me. I then made the transition to Rockbridge, a fee-only financial planning firm, where I truly enjoy helping people and making a difference in their financial lives!”. Patrick is a graduate of the Applied Economics and Management and Animal Science (B.S.), Cornell University, and the CERTIFIED FINANCIAL PLANNER™, (CFP®) program. Learn more and/or Contact Patrick.


You Might Also Like

Other articles filed under Family Finances

Investment Committee Thoughts from Friday 4/27/18

May 8, 2018
Last week, we introduced you to our weekly Investment Committee meetings. When we met for class on 4/27/18, we began our discussion on the subject of an "optimal portfolio." The centerpiece of investment management is portfolio construction. Alongside financial planning,...
Continue Reading

Investment Committee Thoughts from Friday 4/20/18

May 4, 2018
Introduction People from all across the world look forward to Friday.  Friday marks the end of a (usually long) work week and the start of what is supposed to be a relaxing weekend.  At Rockbridge, we look forward to Friday’s,...
Continue Reading

Market Commentary – April 2018

April 23, 2018
Stock Markets Returns from various stock market indices over several periods ending March 31, 2018 are shown to the right. Here are a few highlights: While not observed in these graphs, volatility seems to have come back, which is normally...
Continue Reading

Tax Scams: What to Look For and How to Avoid Them

April 19, 2018
As another tax season comes to a close, we wanted to draw attention to a number of scams and schemes to defraud unsuspecting taxpayers. We think it is important that our clients be aware of how these scams work, and...
Continue Reading

The Value of a Financial Plan

April 17, 2018
It’s common for investors to feel nervous when looking at investments by themselves. Are you saving enough? Are you saving in the right place? Are you holding the right mix of investments? Should you own individual stocks or funds? Are...
Continue Reading

‹ Back to Blog Home

getting started is simple

315.671.0588 info@rockbridgeinvest.com Schedule a meeting Sign Up for Our Newsletter