In investing, theres a competition thats a lot like The Tortoise and the Hare.
The tortoise, exasperated with the hares incessant antagonizing, challenges him to a race.
Our industrious tortoise doggedly pursues his objective.
But the hare, confident of his victory, takes several detours.
The moral: Slow and steady wins the race.
Theres a parallel in the debate between active management vs. indexing.
Active management is viewed as the faster, sleeker, more sophisticated approach to investing.
But which one is the better investing strategy?
What Is Indexing?
First off, lets distinguish between an index a noun and index-ingwhich is an approach to investing.
But there are literally thousands of indexes measuring just about every kind of investment or investment strategy imaginable.
Frequently, indexing is described as passive management, though this is somewhat of a misnomer for two reasons.
First of all, passive investing can include investment strategies beyond indexing.
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What Is Active Management?
The index is used as a benchmark to measure an investment manager or strategy against.
Intuitively, active investment management makes all the sense in the world.
The answer is frequently no.
Indexing vs.
Active Management: Which Is Better?
Hands down, the primary advantage of indexing vs. active management is the cost.
Most actively managed investments (usuallymutual funds) charge around 0.5% to 1.5% in management fees.
(Dont worry they still make money in other ways.)
Most active investment managers fail to outperform their indexed counterparts.
Most do not even break even.
Does that mean that there is no role for active investment management at all?
Such risks include:
But indexing is hardly a low-risk alternative to active investment management.
Its important to consider yourrisk tolerancerelative to your objectives.
David Metzger is a fee-only wealth manager in Chicago.
He is a certified financial planner (CFP) and a chartered financial analyst (CFA).
