Active vs. Passive

A lot has been written on passive vs. active investing and I have nothing new to add to it. However, I came across this highly informative graphic from LPL today depicting the percentage of active managers outperforming vs. the S&P 500 return. It’s pretty clear that if you’re going to allocate to active equity managers that you should really only have a meaningful allocation when the market is generating negative returns. Otherwise, you’re better off in passive investments. The discrepancy is pretty stark (Note it’s unclear if the active funds used in the this analysis were exclusively benchmarked to U.S. large cap indices so the analysis could be a little misleading).

One final thought, since no one can really predict when negative market returns will occur, it seems pretty foolish to be heavily invested in active funds. Don’t get me wrong, active equity funds can have a place in portfolios but you have to be very selective with your active equity managers. There are good ones out there but they’re not always the top performers year in and year out.