Passive Investing: The Emperor Exposed?

Carosa, Christopher
October 2005
Journal of Financial Planning;Oct2005, Vol. 18 Issue 10, p54
Academic Journal
• Traditional studies of the passive versus active management debate appear to contain two flaws that can dramatically affect results. • The snapshot-in-time anomaly creates period dependency, leading to inconsistent results. • The equal-weighted anomaly produces results that while statistically accurate, fail to accurately reflect the results experienced by actual investors. • An analysis using rolling 12-month returns appears to reduce, if not eliminate, the snapshot-in-time phenomenon, leading to more consistent results. • An analysis using asset-weighted performance data to more accurately reflect the actual behavioral patterns of investors appears to produce more significant results. • An analysis of investment return data from January 1975 through June 2004 shows active investors in U.S. equity funds performed better than the S&P 500 two-thirds of the time and by an average of 2 percent annually. • Using both modern portfolio theory and behavioral finance measurements, the investors in active funds appear to have taken less actual risk than the index. • These results have broad implications, not only for financial planners, but for public policy issues such as ERISA and Social Security reform.


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