Do Active Managers Protect Your Downside? | Common Sense Investing

TL;DR

Active managers claim they can protect your portfolio during market downturns, but evidence shows they underperform index funds in bear markets.

Transcript

active money managers want you to believe that they can act defensively to mitigate the downside of stocks during a market downturn this is one of the ways that active managers may try to convince you that index funds are too risky no investor likes the idea of passively sitting by their portfolio Falls with the market investing in index funds mean... Read More

Key Insights

• 🫰 Active managers claim to be able to protect portfolios during market downturns, but evidence suggests they generally underperform index funds during bear markets.
• 🧔 Outperformance in one bear market does not indicate future outperformance, suggesting that active managers might have just been lucky.
• 🙂 The cost of active management can outweigh the slightly higher chance of outperformance during bear markets.

Questions & Answers

Q: Can active managers protect my portfolio during market downturns?

Active managers claim they can reduce losses by making changes to the portfolio, but evidence shows that most of them underperform index funds during bear markets.

Q: Are there any active managers who consistently outperform index funds during downturns?

Research from Vanguard and others shows that there is no evidence of consistent outperformance by active managers during bear markets. Any outperformance is likely due to luck rather than skill.

Q: What is the cost of active management?

The cost of active management can be significant, and the chances of slightly better performance during bear markets may not be worth the higher fees.

Q: How many Canadian mutual funds beat their benchmark index?

In the ten years ending in June 2017, only 8.89% of Canadian mutual funds investing in Canadian stocks and 2.54% of Canadian mutual funds investing in US stocks were able to beat their benchmark index.

Summary & Key Takeaways

• Active managers claim they can mitigate losses during market downturns by making changes to portfolios, unlike index funds which passively track the market.

• However, research from Vanguard shows that most active managers underperform index funds during bear markets.

• Outperformance in one bear market does not guarantee future outperformance, suggesting that active managers who do well during downturns may have simply been lucky.