Once an investor has decided 1) how much to invest and 2) how to split their investments between stocks, bonds and cash, the next decision is whether to invest in active (think mutual funds) or passive managers (think index funds) to get exposure to stocks and bonds.  It’s too bad that this has become the terminology to describe these two different approaches to investing.  When given a choice between being active or passive, I think most people would chose “active.”  However, when it comes to investing, many would argue that passive is better.  I have blogged about this topic before...

I met a teacher at the JUMPStart conference who had a great idea to show students first-hand how difficult it is to beat the stock market.  He plays the stock market game with his class and then compares their individual results with the market return over that period.  The results:  With 150 data points per year, the results tend to fall in the 10-20% of his students outperform the market during this short-term game.  

What brought this topic top of mind again?  This Financial Times article noted that only 1 in 5 active managers is beating the market in 2014, which is their worst record in a decade:

Fewer than one in five active managers outperformed the stock market in the year to the end of October, according to figures compiled by Bank of America…The largest active fund managers have been losing market share to low-cost index trackers and exchange traded funds (ETFs) after academic studies showed them perennially underperforming the stock market after fees.

So, be sure to incorporate passive investing into your lessons on investing!

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.