Quote:
Originally Posted by BYU71
Finance literature probably written by academians (sp). Anyway, it has been a fun discussion. May everyone make a lot of money using their favorite method.
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Of course, its written by academics. If you think the studies are flawed then bring up problems with the studies. Just stating that they are written by academics is not a criticism. Point out flaws in the empirics.
Second, I have no problem with active management. Its fine ... its not going to make a huge difference on average. On average passive will beat active by a little not a lot and active has more chance for upside (someone may get very lucky and choose funds that happens to do fantastic). Of course, it also has a greater chance of a worse downside relative to the benchmarks since passive by definition is basically the benchmark. In fact in aggregate we can prove passive beats active under the following two assumptions:
(1) Passive in aggregate holds approximately the market portfolio
(2) Active is higher costs then passive
If passive holds the market (which seems to be true empirically in aggregate) then by definition active also must be holding the market in aggregate because by definition passive plus active adds up to the market. If active is higher costs then by definition they must do worse because in aggregate the holding are the same portfolio: the market.
Of course, in any given period some active managers do way better than passive even controlling for risk. I have always agreed with that. However, that really good performance in a given period is not usually a good predictor of future performance.