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Passive Investing and Good Advice a Powerful Combination

or many reasons, indexing is the best way to invest. Perhaps the greatest benefit is that you can free yourself from the emotional swings that encumber active investors — swings that hamper most investors’ ability to earn the markets’ superior returns while they simply invest and relax, enjoying a peace of mind we refer to as “Tradeless Nirvana.”

This important point is illustrated in the following chart which shows that average fund investors, who invests primarily in actively managed funds, (the blue bars) capture on average just 36.75% of the actual returns delivered by a fund. This underperformance is easily attributed to what IFA refers to as the “emotions of active investing” and they most certainly take their toll.

Meanwhile, indexers without passive advisors (purple bars) do much better than active investors at capturing a higher percentage of fund returns, the result of a less active approach. However, indexers without passive advisors also fail to capture the full returns of the market. The average passive investor earns only an average of 82.7% of a fund’s return. How can this be? It is likely explained by a failure to rebalance asset allocations during market turbulence, or even the inability to stay invested during rocky markets.

In sharp contrast to average fund investors and indexers without passive advisors, DFA fund investors (green bar) capture all of the fund returns and then some — 109% of the fund returns. According to Morningstar, this exceptional outcome is a result of the “very smart behavior” that is practiced by the passive advisors who are associated with these highly sophisticated investment tools. These knowledgeable advisors encourage their clients to stay invested and rebalance through market turbulence. Such behavior enables these investors to maximize their ability to capture returns, and provides sound justification for the right advisor.  This is the approach IFA implements, making IFA a smart choice, if not the very best choice, for you.

Figure 1 (Direct Link)
Investor Success at Capturing Fund Returns With and Without Passive Advisors

To better understand the investor behavioral mistakes that are illustrated in the chart above, visit here. — To better understand the difference between what average investors earn and what funds earn, see here.

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