The core of the issue is that active investments use the help of larger teams. Accordingly, they bring higher fees with them… by a few percentage points. This may look small or negligible at first but as time goes, the higher fees affect your annual returns (and therefore your compounding returns) and, as a result, the impact of higher fees can be significant over the long term.
Unfortunately, most fund managers fail to beat the market over a long period of time.
Warren Buffett, the world famous investor and CEO of Berkshire Hathaway, stated in a letter to shareholders: “low-cost index funds are likely to beat most active fund managers” (ok, to be fair, he meant in the long run and in the US).
He even goes further stating: “Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors […] can destroy the decent returns that a life-long owner of equities would otherwise enjoy”.
A debate about the two approaches has been ongoing since the early 1970s. Supporters of the passive management argument include academic researchers and privately funded research centres… while active management is rather favored by larger financial institutions.
At Simplewealth, we believe in long term, passive investments in diversified portfolios are the best way to accumulate wealth over the longer term.