Silly Season for the Active/Passive Debate
Five of the goofiest arguments for and against indexing.
Last year was a great time for indexing. This year is a great time for indexing. Next year, there's a 70% chance that it will be a good time to index.
Man, the notions being pushed about indexing are making my head swim. In the past year I've heard a number of silly arguments on both sides of the passive versus active debate. With salespeople and advocates aiming to make a buck for their side, you get a lot of misinformation. Let's take a look at them one by one.
1. "Actively managed funds lost a lot of money in 2008, so why pay their fees when I can index?"
But the funny thing is that index funds lost money, too, so why does the bear market justify one's existence over the other? The biggest index fund, Vanguard 500 (VFINX), lost 37% last year while large-blend funds on average lost 37.8%. Yet, a large pension fund manager was quoted as saying that this was a clear sign that active management doesn't work. I guess that was the most important 80 basis points in history. Underlying this argument is the idea that somehow an active manager should be prescient and move in and out of the stock market at just the right time even if that means violating his prospectus. But then, if your goal is some sort of brilliant market-timing, don't look for an index fund to provide any. They are 100% invested through good and bad times. Moreover, it wasn't a year where you could have picked the right stocks and stayed out of trouble, as in the previous bear market. Nearly everything suffered a double-digit loss.
Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.