Statistical evidence is often used as an argument for passive and against active investment management. The incorrect conclusion rests on the fact that academic research shows that roughly 75% of active managers fail to demonstrate particular skills or beat their benchmark. The superficial takeaway by many industry professionals is that active management has no value. Hence, they invest nearly 100% passively.

It is clearly the wrong conclusion. Both approaches, active and passive, have an economic justification. The appropriate strategy should be to passively invest unless being able to find the 25% of active managers who have statistically significant skills. Some professional investors have the expertise to distinguish between skill and luck among active managers. Their cost-benefit analysis is skewed towards benefits, which can be passed on to clients. A best-in-class solution combines passive management with active managers that can add value of some form to the passive approach.

Nonetheless, passive management is the most suitable long-term standalone solution for the vast majority of retail investors. It is almost impossible for non-professional investors to navigate through the investment landscape and distinct management skills from luck. They are better off with a globally diversified core portfolio.

Evidence-Based Investing