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I seem to be missing something... It happened again today...
For years I've been reading about advantages of passive management, I read Bogle, I am reading Swedroe now. They all make sense to me. I love the strategy - it's so simple and it all so easily comes together. All the quoted studies show the same thing. Many respected investors, even those who made money from active management, recommend passive investing. And when anyone asks me how to invest, the only good advice I can make is to buy index funds... but I don't do it myself!
Every half a year or so (including today), I've been trying to force myself to switch from actively managed mutual funds in my 401k to passively managed ones. So, I go online, and I figure that with all those studies, I will surely find that all or at least most of the 5 of my funds have to be worse than corresponding benchmarks. Sure, I picked the funds after much research but it's really all based on past results, which is NOT predicitve of future, and clearly, it's pretty much luck anyway in the zero-sum game; and besides, they have to work over that extra ~1% in fees every year to just make it even with the passively managed benchmarks... Not to mention we just had some extreme market conditions - huge drop and huge rally over the past year - and so I figure I should see some clear underperformance by the actively managed funds during at least some recent unprecedented periods. So I go to morningstar.com and compare these funds with the corresponding passively managed funds. And all I see is that ALL 5 outperform their benchmarks or match them very closely in all kinds of periods from 3months to 6mnths, 1yr, 3yr. 5yr, 10yrs... I don't see any underperformance, and often some outperformance?!?!
So, then I wonder, was I just lucky again in the past year and should I switch now before the luck runs out? But how can that be? Some of these funds are now closed to new investors; perhaps that helps them? But I would not think so (again based on all the usual arguments).
So, are the charts on morningstar wrong? Are they not accounting for something?
I tried to manually make some computations for 3-4 random cases, but they only led me to conclude that morningstar was correct in most cases (there was 1 exception where they seem to have made a small mistake which I could explain, but that mistake "benefited" the passive fund).
Each time this "real" performance test raises enough doubts in me to pull the trigger and I can't seem to help it. I look at the performance and just don't see why I would switch.
Any thoughts? Similar experiences? Or even better, a simple explanation on what I missed?
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