Why we use passive investing

Autumn yellow leaves on a roadWe always stress the impact that investor’s own behavior has on their own investment performance.  This post deals with the secondary issue which is what investment portfolio you should own.  The questions is:  should you hire someone to try and pick the winners (active management) or just own all securities in an asset class such as large US companies.   We strongly believe in owning whole asset classes rather than trying to pick individual securities in each asset classes.   We also believe that the investment firm Dimensional Fund Advisors (DFA) gives us the best way to develop these passive portfolios.

In an interview with Dan Richards of Client Insights,  DFA’s  Eugene Fama explains the key findings of the paper “Luck vs. Skill in Mutual Fund Performance” that he and  another DFA director Ken French published in 2010.  The paper found that looking at funds over their entire lifetimes, only 3% demonstrate skill after accounting for their fees.  That’s what you would expect purely based on chance. Even the active funds that have generated extraordinary returns are unlikely to do better than a low-cost passive fund in the future.

Click on the button below to begin the 6 minute interview.

Fama Interview – Why asset class investing is better

About Maureen Crimmins

Maureen Crimmins is co-founder of Crimmins Wealth Management and a fee-only independent financial advisor. Have a financial question? ASK MAUREEN

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