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Give Peace a Chance in the Active vs. Passive Debate

Indexing works, but the odds of picking winning active funds aren't as bad as they seem.

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I had thought another article about active and passive funds would be about as exciting as rearranging my sock drawer, but then I caught wind of this donnybrook in the user comment section of this video that my colleague Scott Burns, director of ETF analysis, conducted with index proponent Rick Ferri.

In a nutshell, Ferri says his research shows that very few active managers can beat the market over time and the probability of putting together a portfolio of five to 10 actively managed funds that will outperform a competing portfolio of index funds over a 20-year period is practically nil. Ding! That unleashed a torrent of comments from both sides that reminded me of the old "Point/Counterpoint" segment from back in the '70s on Saturday Night Live. Some users clearly view this as a black-and-white issue and will put forth a lot of effort trying to discredit the other side.

Shades of Gray
I've learned that the truth is often in the middle of such contentious issues, and the only way to find it is to run your own data to see what questions percolate up from there.

Michael Breen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.