Why keeping active will pay in the long run

In today’s Exponential Investor:

  • What impact have passive funds had on the market? 
  • Why is this so powerful? 
  • Could there be trouble ahead?

A man named Burton Malkiel once claimed that a monkey throwing darts at lists of stocks could hit on a portfolio just as good as one that had been painstakingly constructed by a professional. It was in a famous book called A Random Walk Down Wall Street.

Another man, a few decades later, said Malkiel was wrong.

It won’t land on a group of stocks as good as a professional portfolio.

It will pick an even better one.

That was after his company, Research Affiliates, had actually run a study on exactly these lines.

The study took the results of 100 monkeys throwing darts at the stock pages in a newspaper. Amazingly, the average monkey outperformed the index by an average of 1.7% per year since 1964.

“Malkiel was wrong,” stated Rob Arnott, CEO of Research Affiliates, who conducted the study. “The monkeys have done a much better job than both the experts and the stock market.”

And all investors, retail and institutional, young and old, have been taking this lesson just a bit too far, in my opinion…. (more…)

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