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Is Active Investing Better for Long-Term Returns?

March 3, 2017

Contrary to popular opinion, active investing has actually yielded better long-term performance than passive because investors buying active products stay invested longer, according to a new study cited by Wealth Management.

The study, carried out by financial services market research firm Dalbar, calculated returns based solely on the change in assets, excluding how sales, redemptions and exchanges affect an investor’s portfolio, the web publication writes.

Annualized returns in actively managed funds for the 15-year period through 2016 were 4%, while passive funds returned just 2.85%, according to the study. The gap narrowed for shorter investment horizons. For the five-year period ending December 31, actively managed funds had 8.51% in annualized returns while passive funds yielded 8.12%, WealthManagement.com writes.

In the short term, passive investing won hands-down. Annualized returns for three- and one-year periods in active funds were just 3.66% and 7.73% for active funds respectively, compared to 5.4% and 9.4% respectively in passive funds, according to the study.

The reason active funds perform better in the long term is that investors tend to hold on to them better during bear markets, a Dalbar spokesperson insists in WealthManagement.com. Investors are less likely to pull out if they believe there’s a capital preservation strategy in place, according to the company. Active funds are less transparent, which means investors are less likely to make poor decisions, according to Dalbar.

Investors in passive products, meanwhile, are more likely to be swayed by chatter about the main stock market indices, leading them to erroneously sell on downturns and buy at peaks, the web publication writes.

By Alex Padalka
  • To read the Wealth Management article cited in this story, click here.