Active or passive investing? Canada or the U.S.?

Respected studies [1,2,3,4,5,6] show that most investors, pros included, cannot beat a broad market index consistently. These support Habit 3 of The Six Habits of Monday Morning Millionaires.

Canadian members, please note that  adjusted for inflation and currency exchange, the Toronto Stock Exchange composite index lost money over the last decade while the S&P500 composite index more than doubled.

Why would future returns be much different? Wouldn’t investors be better off holding the S&P500 index via say, VOO or SPY or QQQ and sitting in their rocking chairs?

Honest professional money managers agree that a passive investment strategy will work well. One will never ‘beat’ the market with a market ETF, of course, and many investors feel that they can do better.

We are referencing Canada’s underperformance here because the majority of the Toronto Stock Exchange is in financials and resources.  If these sectors do not move as is happening now, then Canada will underperform the U.S. But, in inflationary times, a distant memory currently, Canadian markets will likely  outperform U.S. markets. That might occur over a decade from now.

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The Monday Morning Millionaire Program was designed to offer compressed investment opinions. Over the last two decades, these have outperformed over 90% of portfolios, including professionally managed ones.

The program does not provide any investment advice or endorsements.

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Bibliography
1. Fama, E. F. (1965). “The Behavior of Stock-Market Prices” The Journal of Business 38, No. 1, pp. 34-105 The University of Chicago Press
2. Fama, E. F.; French, K. R. (2012). “Size, value, and momentum in international stock returns” Journal of Financial Economics. 105 (3): 457, doi: 10.1016/j.jfineco.2012.05.011
3. Rompotis, Gerasimos Georgiou, “Active vs. Passive Management: New Evidence from Exchange Traded Funds” (February 4, 2009). Available at SSRN:https://ssrn.com/abstract=1337708 or http://dx.doi.org/10.2139/ssrn.1337708
4. Blake, C.R., Elton, E.J. and Gruber, M.J., 1993, “The Performance of Bond Mutual Funds”, Journal of Business 66 (3), pp. 371-403.
5. Malkiel, B.G., “Returns from Investing in Equity Mutual Funds 1971 to 1991”, Journal of Finance, 1995 50 (2), pp. 549-572.
6. Gruber, M.J., 1996, “Another Puzzle: The Growth in Actively Managed Mutual Funds”, Journal of Finance 51, pp. 783-810.

Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me

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