Dan Solin's Newsletter, January 26, 2017

"Get the Best of Both Worlds" is Nonsense

Proponents of active management are reduced to making this argument to save their withering business model:  Get the best of both worlds by using both index funds and carefully selected actively managed funds.

Don't buy it.

There's no way to select actively managed funds likely to outperform in the future.  What we do know is the majority of them underperform their benchmark every year.  Over the long-term, the chance of an actively managed fund consistently outperforming its benchmark is minuscule.

You would likely earn higher expected returns by limiting your investments to low-cost index funds, broadly diversified, in an asset allocation suitable for you.

"Getting the best of both worlds" is more likely to reduce the expected returns you could earn if you stuck with one world:  An index-based one.

Dan