The Math That Hurts Active Investors

The Math That Hurts Active Investors by Luke F. Delorme, AIER

Investors have to choose between funds that are actively managed and those that are passively managed.

Active management involves selecting individual stocks or timing the market just right, in an attempt to do better than everyone else. An active mutual fund manager might analyze all of the stocks in the S&P 500 and pick the 50 of them that he or she believes will outperform the rest.

Passive management simply means choosing a whole universe of investments and letting it play out over long periods of time. Passively managed funds, for instance, will buy all 500 stocks in the S&P 500 instead of trying to pick the best 50...