Is Skill Still Relevant In The Era Of The Indexes?

Summary:

More and more, investors are deciding to put their fund investments in index funds/ETFs and moving away from managed funds.

Such action is based strongly on the assumption that trying to manage a portfolio of funds either by an investor himself or a fund manager will underperform an unmanaged portfolio.

This implies that skill in prediction of investment outcomes on average cannot consistently result in better performance than merely using low-cost indexes.

While true recently, managing with a long-term focus is the only way to capitalize on extreme instances of over- and undervaluation which mainly occur after many years.

Overachieving investors/managers will not overreact to constantly churning data; however, they will need to react, and not be passive, in the face of glaring price mismatches that occasionally develop.

Anyone failing to notice that index funds, along with index-based ETFs are, day-by-day, becoming the preferred investments for investors likely hasn’t been paying much attention. So it’s more important than ever to consider the question of whether portfolios still managed based on presumably skillful interventions can realistically ever hope to consistently beat portfolios run on autopilot, that is, passively managed and made up of index funds.

More and more, this question seems to be spiraling toward a consensus conclusion: Managers and active investors, it is now said, are almost deluding themselves if they continue to think that they can ever hope to come out ahead long term over the currently most popular index funds that charge so little and, additionally, help to take all the pain and guesswork out of deciding where to invest.

Therefore, as the debate becomes one-sided favoring index funds over managed ones as well as ETFs over ordinary mutual funds, many might think I am trying to defend an almost an indefensible position these days, namely, that actively managing your own portfolio, or using “old-fashioned,” managed funds, or both, can result in just as good or even better outcomes than very little activity or just using the most popular broad “total market” index funds or ETFs.