Are You Better Off Buying an Index Fund? | AWM Insights #103

The most recent SPIVA Report for 2021 was just released and once again the same conclusion is reached. “Passive” has beat “Active” and only 15% of active managers that are paid to beat the market, did not.  Passive investing, sometimes referred to as indexing, doesn’t engage active stock picking. Active management attempts to beat “the market” through the fund manager selecting the stocks.  The great news for investors is that this competition between active managers creates efficient markets that are cheap and easy to buy through index funds. All you have to do is listen to the evidence.  Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join. EPISODE HIGHLIGHTS: (0:32) Brandon and Justin discuss stock picking and marketing timing. Is active or passive investing winning?(1:44) Active investors are trying to beat a benchmark. The most common benchmark is the S&P 500 Index. (2:06) An index is a defined collection of stocks. The Dow Jones Industrial Average has been around for over 100 years.   (3:20) Active Management is commonly compared to these indexes to determine if the cost of research and implementation is worth the return.(3:50) You can’t actually buy an index itself but you can buy funds that very closely track its return. Plus, they have cheap fees. (5:20)Dispelling the myths of stock picking.(5:45) Active managers believe they can read the tea leaves and predict what’s going to happen. They also overweight or underweight sectors to “beat the market”.(6:25) The evidence every year shows it’s impossible to beat the market consistently.(7:09) SPIVA stands for Standard & Poor Index Versus Active report.(7:30) The report compares the many S&P benchmarks to the actively managed funds and identifies which ones outperformed and which underperformed. (8:50) 85% of active managers underperformed the S&P 500 over the last year.(10:35) Can you find the small percentage of managers that do outperform?     (11:40) You can find better odds of winning than the 10 or 15% chance of picking the next outperforming active manager. You can get close to 50/50 in Vegas.(12:20) If for some reason you decided to try to identify which fund will outperform in the future, what are the characteristics to identify?   (13:28) Taxes are frictional costs that drag on investor returns, and do not show up in these numbers. These hurdles also hurt investors' gains.(14:22) The powerful takeaway: If you’re smart enough to take in the data. You can have a perspective change which will help you avoid the silly game of attempting to outperform the S&P 500.   (15:22) The amount of intelligent people with virtually unlimited resources is the reason the indexes are so hard to beat. This competition is what creates this efficient market which is a plus for investors that listen to the data. (15:53) If stock-picking isn’t the right way to beat markets, should you just buy an index fund or is there another way to find outperformance?