Active vs. Passive Investing
You can’t beat the market. Almost no one can.
The Seductive Lie
Stock picking and market timing appeal to ego. “Why settle for average returns? With research and skill, you’ll outperform.” Finance YouTubers, newsletter gurus, and your coworker all claim they can pick winners.
They’re almost certainly wrong.
What The Evidence Says
>90% of active fund managers underperform index funds over 15+ years [@spiva2024]. Not retail traders—professional fund managers with teams, data, and resources. They still lose to a simple index fund.
The SPIVA Scorecard tracks tens of thousands of portfolios. The pattern is consistent across countries and time periods: active management destroys value after fees.
Even the winners aren’t consistent. Last decade’s top-performing fund is no more likely to outperform next decade than random chance.
The Math
| Approach | 30-year return on $10k/year (7% market) |
|---|---|
| Index fund (0.03% fee) | ~$944,000 |
| Active fund (1% fee) | ~$761,000 |
| Active trading (tax drag + fees) | Often worse |
The “average” return beats 90% of professionals. Average is excellent.
What To Do
Core (90-95%): Low-cost index funds. Total market or S&P 500. Set it and forget it.
Satellite (5-10%): If you enjoy it, speculate with money you can afford to lose. Treat it as entertainment, not strategy.
Never: Put serious money on stock picks, options, or crypto timing.
Boring is profitable. Index funds are boring. Therefore, index funds are profitable.
See Automated Investing for the protocol.