"Active managers take 100% of your gains"

"...During the 1980s and 1990s, nobody quibbled over a fee of 2% when stocks put on 18% a year. Since 2000, ...returns have averaged just 4%.

A fee of 1% is now quite a burden, a quarter of your return straight to the pockets of active managers.

...It isn't that low-cost index investing is an option you should consider. Rather, it's fast becoming the only way to invest that makes mathematical sense at all.

...Since the index investor gets the market return at the market level of risk, active managers must outperform consistently to overcome the down years they experience, times when their strategies fall out of favor.

But let's assume they do that. And let's assume that the active fund somehow beats its benchmark by 0.5%, year after year. Even so, Ellis explains, such a fund charging 1.25% in fees and a 12b-1 fee of 0.25% as a percentage subtracted from assets is in fact asking the retirement investor to accept a constant 75% hit on the return.

...The fund beats the market for years (one hopes) and, even so, you get just a quarter of the gains and they keep three-quarters of it.

Because a majority of active managers now underperform the market,
their incremental fees
are over 100% of the long-term incremental, risk-adjusted returns.

Charley Ellis

...Once, institutional investors such as banks and insurers were behind less than 10% of trades and individuals did more than 90%. Beating the market wasn't just possible, Ellis contends, it was "probable for hardworking, well-informed, boldly active professionals."

Those days are gone. "Now, more than 95% of trades in listed stocks and nearly 100% of other security transactions are executed by full-time professionals who are constantly comparison-shopping inside the market for any competitive advantage," Ellis writes.

...That the investing industry continues to promote active management raises real ethical questions, Ellis maintains, questions that retirement investors would be wise to raise with their own advisers."


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