This article is about the question of which investment strategy is more successful in the long term. Are actively or passively managed funds better?
Beating the market
The core promise of actively managed equity funds: outperform the market, deliver more returns in a bull market, lose less in a bear market. Is it possible? An attempt at scientific enlightenment
The SPIVA study
The SPIVA study ( S&P Indices Versus Active Funds) of the index provider "S&P Dow Jones Indices" compares actively managed funds with their respective benchmarks from S&P. The comparisons (score cards) are made for different markets and regions. Included: Australia, Europe, India, Japan, Canada, Latin America, South Africa and the U.S. The comparison is biennial.
Key findings of the SPIVA study
SPIVA's 2017 year-end study found that only 1.2 percent of actively managed global equity funds traded in euros performed at least as well as their benchmark index, the S&P Global 1200, over a ten-year span. The study also shows: Over shorter periods of time, significantly more fund managers manage to beat the market. As many as 46 percent of fund managers manage to beat the S&P Global 1200 over a one-year period. However, this was probably just luck. Because: Generating returns above the market average on a regular basis over many years is the only true way to distinguish between fund management skill and a lucky streak.
What does the evaluation look like with regard to the individual regions??
The evaluation looked only slightly better with regard to individual regions: 12.0 percent of the eurozone equity funds, 15 percent of the Europe equity funds and 25.6 percent of the Germany equity funds were able to beat their benchmark indices over a ten-year period.
Active risk management: Why is it so incredibly hard to beat the market??
Even the only marginally better figures in Germany or Europe are only a weak argument for supporters of active management. After all, they mean that even in the best case scenario, three out of four funds perform worse than a passive equity investment. The main reason is the significantly higher costs of active management, which must be earned in addition. After all, fund managers not only have to beat their benchmark index before costs – they also have to generate annual management fees of 1.5 percent or more. This is obviously an almost impossible task even for experienced portfolio managers. How well the fund managers managed to accomplish this task is also recorded numerically by the SPIVA Report: While the S&P Global 1200 Index, which is traded in euros, generated an annual return of 7.76 percent over ten years, actively managed global equity funds generated only 3.92 percent annually.
Over a period of 10 years, the active funds have, after costs, on average only achieved about half as high returns as the passive index. This trend is also present in other regions, albeit in somewhat weaker form in some cases. In very few regions of the world do active investments perform better than their index. In Germany, for example, actively managed equity funds in euros have returned an average of 5.31 percent over the past ten years, while the S&P Germany BMI has only managed 5.30 percent. An absolutely marginal difference for 10 years of work of the fund managers, but still.
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Conclusion: Active or passive investments?
So we conclude: The passive investment does not generally outperform its benchmark index. But in contrast to the majority of active funds, it does not fall drastically either. Active funds have big problems in all markets of the world to compensate the high management fee by clever risk management. Active funds have not been able to significantly outperform the corresponding index in any market over the ten-year period. By the way, this statement also applies to emerging markets, which are considered to be rather inefficient.
In the long run it is better to be as good as the market average. The attempt to beat the market over the long term has failed in almost all cases in the past. My recommendation is therefore clearly the passive investment.
What can I personally do with these findings??
Choose an active or passive robo-advisor!
Also convinced by the SPIVA study? Or do you prefer to trust an active management? Choose a suitable robo-advisor that actively or passively invests the money for you, depending on your personal preference. The low-priced Quirion is particularly suitable for beginners. Here you can invest in ETFs starting at a monthly savings rate of 30 euros. In addition, Quirion was the winner of the Stiftung Warentest test in August. An easy-to-use and inexpensive Robo Advisor with sufficient risk classes is also offered by Growney. In addition, you can start investing with Growney already from 1 Euro. You can find a review of Growney here. If you already have more concrete ideas about your investment, the provider Weltinvest is worth a look. Read more about the right Robo-Advisor here.
Choose your tailor-made portfolio as a passive or active investor
It is important that you choose your stock portfolio according to your investment plan. Only in this way you can effectively minimize the depot costs. In contrast to dividends and price increases, custody costs are as certain as the Amen in the church. Pay attention therefore in particular to keep it minimal. Compare here the best portfolios for active and passive investment: Whether you are or want to be a frequent trader, beginner or passive ETF investor. Another tip: Starting with the second-best securities account is a thousand times better than not starting at all. Pay attention therefore carefully to the costs, but come after a Rechereche also soon in the implementation! Read more about the right portfolio here.
Read more about passive investing in the classic book on passive investing strategy par excellence here
The "Komer" is the classic among passive ETF investors par excellence. The author has a sober and scientific writing style and brings you the advantages of a passive investment clearly closer. In addition, the book is a basic training on our money and finance (where does it come from?, How it works?, What is it all about me?). The author also lists other ways to optimize returns, but advises against them because of the risk and expense involved. For all of you who are serious about starting to invest (or even are already semi-pros) I highly recommend this book. Of course, I have read the book as well!
Disclaimer: This book is tough stuff! It is written in scientific "proof style". As a reader, one is definitely challenged here in following the train of thought.