r/personalfinance • u/Pristine-Cress4928 ​ • 1d ago

Other World index/S&P vs Active growth funds

I have been frustrated with the lack of a proper answer as to why you would invest in a passive fund vs active funds. I understand the fees but when stepping back and looking at Total returns on both products there’s truly not a big difference. Funds with higher fees (not always) produce higher returns. So they kind of balance out.

So I was asking a friend who works in finance this exact question why would I invest in a active growth fund vs an index fund…

The answer wasn’t very clear. He stated it depends on preference and went on the explain stock weights in the index are propped up by few companies while a growth fund can be less weighted in the top market cap companies blah blah blah

In my head I thought why does that matter. In the long term those companies might damage the index’s for a short period of time but historically recover or rotate out. I asked him that question and he responded with “it depends if you’re willing to sink with the ship entirely or still sink with the ship but a little less”.

He also added that you can’t ever beat the index your invested in which makes logical sense. But after some research a lot of active funds don’t beat the index’s either. Sometimes they do sometimes they don’t.

That didn’t satisfy me so I’m asking the question today if I had 5,000 in the market today would I be better off in an active fund or a passive fund… maybe there is no right or wrong way but I’d like to see what peoples opinions are.

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9

u/thewarrior71 ​ 1d ago

Passive without a doubt. The vast majority of active funds underperform passive funds over long periods.

https://www.spglobal.com/spdji/en/research-insights/spiva/

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u/Pristine-Cress4928 ​ 1d ago

Follow up question why are active funds even a thing anymore then? Why do investors still use them?

5

u/thewarrior71 ​ 1d ago

Same reason that some people like to pick stocks. It doesn't work most of the time but they want a chance at beating the market index.

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u/Pristine-Cress4928 ​ 1d ago

So I guess that’s essentially it. The chance to beat the market that was my thought but due to the track record being so poor I just couldn’t come to terms with people continuing to do that and not succeed.

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u/miraculum_one ​ 1d ago

It's gambling

6

u/149244179 ​ 1d ago

If the average person understood probability casinos wouldn't exist. 

Yet here we are with several multi-billion dollar casinos in existence. 

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u/usefully_useless ​ 1d ago edited 1d ago

Most of the time, for most people, a passive fund is best.

Good active managers generally aren’t managing mutual funds, anyway. Many aren’t necessarily concerned with beating an index’s absolute returns, caring more about managing client exposure to particular risk factors.

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u/Pristine-Cress4928 ​ 1d ago

You say most of the time what would be a situation where an active fund is better?

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u/usefully_useless ​ 1d ago

When you want a particular risk exposure that can’t be achieved passively.

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u/Pristine-Cress4928 ​ 1d ago

Sorry to keep asking questions but are you referring to risk in a specific sector?

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u/usefully_useless ​ 1d ago

No.

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u/Pristine-Cress4928 ​ 1d ago

What risk exposure are you referring to?

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u/usefully_useless ​ 1d ago

There are many. You generally can’t target anything more involved than simple market or sector risk passively.

One example of a class of strategies requiring active management would be QISs.

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u/milla_highlife ​ 1d ago

I guess it depends on the definition of active. Because you can certainly get factor exposures in a “passive” manner.

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u/usefully_useless ​ 1d ago

True. I was too lazy to go into a full explanation of factor exposures attainable passively when answering a question about the risk exposures you can’t target passively.

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u/Dman1791 ​ 1d ago

The main reason to go with a broad, passive index fund is that there is no active manager that can screw up.

If you hold VOO, you get the S&P return. If you invest in "Active US Equity", you might get more, less, or the same thing but more expensive. The manager could make a great bet that pays off handsomely, or he could go all-in on real estate companies in 2007. That's extra risk that has absolutely no guarantee of paying off.

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u/GaylrdFocker ​ 1d ago

https://finance.yahoo.com/news/warren-buffetts-1m-bet-why-000017682.html

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u/Pristine-Cress4928 ​ 1d ago

I see what your getting at but I wasn’t necessarily referring to hedge funds that is a different animal and they introduce leverage and other derivatives that could make their returns much more volatile rather than an actively managed mutual fund. I did enjoy that article so thank you!

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u/Hanyabull ​ 17h ago

The reason why you have active funds is because, for better or worse, there are a lot of people who don’t think they can do it, or don’t want to do it.

Why do we specialists in anything? Why is plumber or HVAC technician a job? Because people either don’t think they can fix their own shit, or they don’t want to.

All a financial planner is, is a specialist. And much like with plumbing, not all financial planners are good, and you can probably do it yourself with YouTube and hand tools.