Academic journal article Journal of Accountancy

Active Management vs. Indexing. (Letters)

Academic journal article Journal of Accountancy

Active Management vs. Indexing. (Letters)

Article excerpt

The article "Fear, Greed and the Madness of Markets" (JofA, Apr.03, page 79) was well-done, up to a point. The commentary about emotions driving many investors' decisions was right on. Buying high and selling low is the norm for many, including most of the highly paid professionals upon whom the public relies.

However, like many investment articles the JofA has published, it was skewed in avoiding mention of the best proven route for the average investor--simple, low-cost index funds. While "the sage of Omaha" is referenced in the article, Warren Buffett's bias toward index funds is conspicuously avoided in the commentary. Buffett has noted in his annual reports the average investor would be better off avoiding Wall Street and investing in index funds (excluding Berkshire Hathaway Inc. stock, which has outperformed the averages for decades).

Similar to most articles published by the money management community, two sentences in the article, in particular, advocate the need for the average investor to use a professional investment adviser: "Smart investors rely on investment professionals who are highly knowledgeable about behavioral finance--a discipline that carefully analyzes how individual and group psychology influences investor behavior and market trends" and "As many CPAs already know, all it takes is the right adviser--and the right tools." The inference is, properly selected, active investment advisers have the answers to produce results the average person can't possibly attain. This is just not so. The average person has at his disposal the means, through index fund investing, to outperform the vast majority of both mutual fund managers and professional advisers, for minimal fees.

Unfortunately, while the article would like the reader to conclude that seeking professional advice is the "right tool" to cure poor investment performance, statistical evidence points to the contrary. …

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