Did you know that during this year’s stock market decline, many average investors have appeared to have made better investment decisions than professional investors? Back in April, The Wall Street Journal noted:
In the market chaos of recent weeks, professional investors headed for the exits while individuals held steady.
It’s a dynamic that upends the conventional wisdom on Wall Street about how investors behave during market turmoil.
So far this year, hedge funds have sold over $1 trillion more shares than they have purchased, even as individuals have made $50 billion a month in net stock purchases, “with little interruption,” according to JPMorgan.1
“Smart” money fled fearfully. “Dumb” money stayed-the-course or bought more.
Would you like to know another way dumb money beats smart money? The underperformance of active investment funds versus passive investment funds.
The advertisement for an active fund is that you pay the professionals to pick the stocks instead of just investing in an index. For example, you pay “smart” John or Sally to pick various stocks out of a “boring” index like the S&P 500 that they think will outperform. The problem is that most of the Smart Sallys and Johns out there rarely beat the index. According to investing author Larry Swedroe, the SPIVA research data shows:
Over 20-year period 2005-2024, 94.1% of all domestic funds underperformed the S&P 1500 Composite Index. And of the 18 domestic fund categories (including variations of large, mid, small, value, growth, and real estate), in only two categories did less than 90% of the funds underperform their benchmark. The “best” category was large value funds were 87.8% of funds underperformed.2
After citing SPIVA evidence of this in various other asset classes, Swedroe makes the following brutal conclusion:
The data is unequivocal: active management’s persistent failure is not a temporary phenomenon, but a structural reality. For investors, the prudent path remains clear—embrace low-cost, systematically managed funds and let the odds work in your favor.3
Morningstar data in the above chart also confirms how often most active funds in all kinds of asset classes--—though not as much with bond funds and real estate funds— underperform over the long term.4
This does not mean that active funds are always a bad investment decision, nor does it justify being uneducated as an investor or not paying someone to help you invest. Rather, it reveals that the secret sauce to investing is consistently acting according to a financial plan and avoiding high costs (especially for funds that don’t deliver). Finally, it reveals that one of the smartest things you may do is to not try to outsmart the market.
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Sources:
1. “As Markets Swooned, Pros Sold—and Individuals Pounced”, April 25, 2025. Accessed online: https://www.wsj.com/finance/investing/market-chaos-professional-investors-sold-stocks-individuals-bought-d1c325c6
2. “Active Management’s Persistent Failure: A 2025 Perspective”, June 24, 2025. Accessed online: https://www.wealthmanagement.com/investing-strategies/active-management-s-persistent-failure-a-2025-perspective
3. Ibid.
4. “Too Many Active Funds are Priced to Fail. Should Investors Steer Clear?”, Jeffrey Ptak, Mar 18, 2025. Accessed online: https://www.morningstar.com/funds/too-many-active-funds-are-priced-fail-should-investors-steer-clear