Active vs. passive
Around nine in ten actively managed funds trail the market over the long run.
In One Sentence
Active funds rely on a manager picking stocks to try to beat the market, while passive index funds only aim to keep up with it; given enough time, the funds that only try to keep up end up beating most of the others.
Why It Matters
Many people think that handing their money to a professional manager must be better than buying the broad market themselves. But managers can't predict the market any better than anyone else, they trade often and they charge more, so over the long run most of them fall behind the index. That's why I don't go looking for star managers; I simply buy the whole market.
One Number
Among US large-cap active funds, about 90% trailed the S&P 500 over 15 years, and about 93% over 20 years (SPIVA 2025 · Chapter III).
In the Book
Chapter III uses the SPIVA statistics and Buffett's ten-year bet to show that even experts struggle to beat the market. Chapter V lists it as one of the reasons to buy only the broad market.
Go Further
- Broad-market index ETFs If even experts struggle to beat the market, you might as well buy the whole thing.
- Warren Buffett In his ten-year bet, the index fund returned about 8.5% a year, while his opponent's funds of funds averaged about 3%.
- Fees and costs Active funds cost more, and that cost compounds every year, so the gap keeps widening.
- Single-stock risk Managers pick individual stocks, and most individual stocks shrink their shareholders' wealth over the long run.