Investo-Masochism: How a Passive Approach to Investing Can Lead to Suffering

Abstract

Not many fields of human endeavor exist in which we start with the hope of attaining the average. Yet in investments the current prevailing wisdom appears to be that mediocrity is acceptable, maybe even aspirational. Large swathes of the institutional investment community consciously decide they are satisfied with one particular way of measuring the market’s average return, and, in fact, pay managers fees to replicate it. These passive “index managers” are among the largest investors in the industry, stewards of trillions of dollars. And passive investing has actually gained in popularity recently. But in a low-return environment, is that what investors should be doing?

This article exposes some common and widely accepted misconceptions about active versus passive management and makes the case that substantial amounts of money with which to pay pensions benefits are being left on the table by fiduciaries content to endure the market returns without attempting to improve upon them.