Index funds are by far the best option for the average investor. But is there ever a case for choosing an actively managed fund?
See Part VII here.
Actively Managed Fund: How To Win The Loser’s Game [PART VIII]
Transcript
Before moving on, let’s briefly summarize.
Mathematically, after costs, the average returns of a passive investor have to exceed the average returns of an active investor.
The market cap-weighted index reflects the consensus view of the market and therefore is the ideal starting point for a passive investor.
But the cap-weighted index isn’t perfect and, depending on how much risk they’re prepared to take, investors may want to tilt their portfolios towards other types of risk, or beta, such as small company or value stocks.
Beta, as we’ve said, is a measure of overall market risk. But what about alpha? that’s the name given to any return provided by a fund or an individual security over and above the benchmark index.
First and foremost you should be indexing. Alternatively you could tilt your portfolio towards different types of risk.
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