So what can we do? Well, if the objective is to ensure the greatest probability of success for those who depend on it, increasing one’s allocation to passive investment options is one way that may help.

My thanks to Yan Zilbering for his assistance with this blog.


1 For the [TIME PERIOD ENDED] August 31, 2015, investors moved $38.5 billion into passive equity funds versus $114.2 billion out of actively managed equity funds, and they moved $41.3 billion into passive fixed income funds versus $8.4 billion into actively managed fixed income funds, according to Morningstar, Inc.

2 For a detailed discussion of this phenomenon as it relates to Vanguard ETFs® and funds, see Francis M. Kinniry Jr. and Yan Zilbering, 2012. Evaluating dollar-weighted returns of ETFs versus traditional fund returns. Valley Forge, Pa.: The Vanguard Group. In addition, the implication of the timing of investor cash flows are discussed in Donald G. Bennyhoff and Francis M. Kinniry Jr., 2013. Advisor’s Alpha, Valley Forge, Pa.: The Vanguard Group

3 This is not the best methodology with which to evaluate passive versus active, but it suffices for this example. For a more robust analysis of how actively managed funds have fared, refer to Christopher B. Philips, Francis M. Kinniry Jr., Todd Schlanger, and Joshua M. Hirt, 2014. The case for index-fund investing. Valley Forge, Pa.: The Vanguard Group.

Notes:

All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.