Noah Smith, Columnist

Stock-Picking Pros Beat the Indexers

Smart money managers outperform the market. But their fees are too high and investors are better off in passive funds.

November 16, 2016 at 1:00 PM UTC

Noah Smith is a former Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

They earn their keep.
Photographer: Justin Chin/Bloomberg

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Passive investing is eating the mutual-fund industry, as money floods out of actively managed funds and into index funds and exchange-traded funds. “Passive” typically means two things -- diversification and minimal trading. Active funds are supposed to make money by concentrating their investments and taking advantage of good opportunities. The case for passive investing is that active investing is a losing game.

Most finance professors will tell you that active management isn’t worth it. The market is just too efficient -- efforts to beat it cost time and money but produce little in the way of extra risk-adjusted returns. Better to ride the average with an index fund or ETF than waste time trying to out-think the crowd.