There is universal truth such as 1 + 1 = 2. Using basic arithmetic, Nobel Prize winner William Sharpe shows us another eternal truth to answer the question: Do active investors in aggregate earn a higher expected return than passive investors? The answer is that “the average actively managed dollar must underperform the average passively managed dollar, net of costs.” Consider the portfolio of U.S. common stocks weighted according to the total market value of their outstanding shares. Passive investors earn the return on the market minus their fees and expenses. Active investors in aggregate also earn the market return minus their fees and expenses. The fees and expenses of active investors are higher than those of passive investors so active investors in aggregate must lose to passive investors. The basic arithmetic is very obvious to any personal finance readers. Whenever there’s any argument about active investing vs passive investing, please include this link to settle the matter. The eternal truth is that active investors in aggregate lose to passive investors now and forever. Don’t play a negative sum game and avoid active investing in your retirement accounts. (stanford.edu)
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