Index funds vs. stock picking: what the long-term data says

An index fund does not try to be clever. It simply buys every company in a market index — such as the S&P 500 — in proportion to its size. An active fund pays analysts and managers to pick the winners instead. You would expect the experts to come out ahead. Over the long run, most do not.

The scorecard

S&P Dow Jones Indices has tracked this for more than two decades in its SPIVA reports. Over periods of 15 years or longer, the large majority of actively managed US large-company funds have trailed the S&P 500. Similar patterns appear in most markets studied.

Why it is so hard to win

• Fees compound. A 1 percent annual charge sounds small, but over 30 years it can consume a large share of your final balance.
• Markets are competitive. Thousands of professionals are trying to find the same mispriced shares.
• Last year’s star rarely repeats. Top-performing funds tend not to stay at the top.

When active can make sense

Some investors use active funds in less-covered markets, or for specific goals such as ethical screening. That is a reasonable choice — as long as it is a conscious one and the fees are justified.

You cannot control what the market does. You can control what you pay and how long you stay invested.

This article is general information, not personal financial advice.