Is the only solution then a static allocation of passive, market-weighted investments? No — inefficiencies will always exist. Therefore, the plan should be to seek out inefficiencies and exploit them. With nearly everyone fishing the same pond for individual company opportunities, it might serve investors to look for fishermen that have elected to change ponds and fish where ample opportunities exist.
Research consistently shows that the two largest components to long-term investment return are market participation and asset allocation. However, very few of the large firms focus on those factors. Instead, they focus almost all of their attention on finding the next Google, Proctor & Gamble, or Home Depot.
This issue was highlighted in a CNBC panel on October 20th, 2015 with leaders from three prominent mutual fund families. They all promoted active management, focusing on stock selection and argued that 2015 was the year of the stock picker. When the host asked if they ever make asset allocation calls or market participation calls, the CEO of one said they leave that decision to the client. These three large investment firms readily admitted to leaving the two most important investment decisions to the client.