In addition, active investors generally pay around 1.35% a year in fees, compared to around 0.20% a year for passive investors. According to the Dalbar study, the average active investor earns 3% to 4% less annually than the average passive investor. That’s a really big deal.
With all the research to the contrary, why does active investing flourish?[related_stories]
There are three reasons.
First, people are confused. Few investors understand that Wall Street has every financial incentive to keep you confused. So does much of the financial press, because passive investing doesn’t sell papers or magazines. We don’t see headlines reading, “What You Need To Do With Your Portfolio Now: NOTHING!”
Second, people tend to be extremely overconfident. Most of what people mistake for outperformance in a money manager is actually just dumb luck. According to Ken French, professor of finance at Dartmouth, it takes 64 years of data to sort through all the random probabilities to assess whether a manager’s short-term beating the market is due to skill rather than chance.
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