“…the thrust of these studies – that mutual funds, on average, underperform the market by a margin roughly equal to their operating expenses and trading costs – has been reconfirmed so many times that anyone who doubts them should found a financial chapter of The Flat Earth Society”
“The Intelligent Investor” by Benjamin Graham
What is passive investing?
There are two main investing styles, active and passive. We, like all smart investors, believe in passive investing.
An active investor believes they can outperform the market. That is, they believe that through their research and intelligence they can gain an advantage over the market and pick the stocks that will perform the best. If you invest in a managed fund then you are paying the fund manager a fee for their knowledge and their skill in outperforming the market.
Unlike active investors, passive investors believe that it is not possible to outperform the market. They believe that the market knows everything and that you can’t pick the best performing stocks or avoid the worst performing stocks because any information about performance is already factored into the price. Therefore, it is best to just invest in the market.
Index funds are a way of investing in the market. For example, if you invest in an index fund tracking the ASX100 you gain exposure to the largest 100 companies in Australia.
We believe that the smartest way to invest in an index fund is by purchasing an Exchange Traded Fund that tracks the index.
Why passive investing?
According to the SPIVA Australia Scorecard, over a five-year period passive index investing outperformed:
- 70% of Australian equity funds
- 77% of Australian bond funds
- 83% of Australian Equity E-REIT funds
- 93% of International equity funds
The data clearly shows that passive investing outperforms active investing, which is why we adopt this approach.
The data also highlights the importance of picking the right investment style. The costs of active investing can add up over time when under performance, high fees, and inaccurate market timing is compounded year after year.