The True Cost of Actively Managed Investments

True Cost of Actively Managed Investments

There are two kinds of investors. Passive and active.

This is somewhat of an oversimplification, but essentially there are those who believe in owning broadly diverse funds with low administrative costs and holding them for the long-term—versus those who believe in buying stocks that show signs they’re about to go up and selling stocks that look like they’re going to drop, making money in the short-term.

While the former, passive, philosophy has been gaining in popularity, the latter, active philosophy is certainly a lot more exciting. In the popular financial media, you almost never hear the names of passive fund managers, while on a daily basis you’re kept up-to-date on the latest moves of so-called star active managers who are buying or dumping huge stock allocations based on short-term outlooks.

Not only are the exploits of the active managers more interesting, but they always seem to have a good reason for what they do. And when one of these funds chalks up a good year or two, you might wonder if you’re missing out on something.

Careful analysis shows you’re not. 

Last year, economist Moshe Levy published a study in The Journal of Investing in which he evaluated the performance of all U.S. actively managed equity funds for the thirty-year period of 1991 – 2021. Importantly, his analysis accounted for survivorship bias, the tendency to omit the performance of funds that no longer exist because they’ve gone under.1

Levy found that over the past three decades more than 92% of active funds did not perform as well as the S&P 500. And even more striking, he showed that the aggregate annual loss to investors in these was $235 billion ($186 billion in inefficient allocation and $49 billion in fees).

So why do people keep handing their money over to active managers? Levy concluded, “When choosing funds, investors attach too much weight to historical returns.”

Financial author Larry Swedroe took Levy’s data, and after calculating the difference in fees between active and passive investing, wrote, “Active investors have engaged in a massive transfer of wealth—about $80 billion annually, based on the then-market capitalization of about $12 trillion—from their own wallets into those of the purveyors of actively managed products and market makers.”

The point is not that active management is dishonest or does not play some role through its “price discovery” in the efficient allocation of capital. It’s just not the most prudent way for the average investor to grow his or her nest egg over the long-term.

Because saving for and living through retirement is a process that takes decades, things like inflated fees and unnecessary risk can have a sizeable effect over time. It’s in your self-interest as an investor to follow the strategy with the best potential for meeting your retirement goal. And that includes the guidance of a trusted advisor to help you adjust your plan along the way and hold you accountable to your future self.



The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.


This article was written by an independent third party. It is provided for informational and educational purposes only. The views and opinions expressed herein may not be those of Guardian Life Insurance Company of America (Guardian) or any of its subsidiaries or affiliates. Guardian does not verify and does not guarantee the accuracy or completeness of the information or opinions presented herein. | 2024-171302 Exp. 03/26 Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5280 CARROLL CANYON ROAD, SUITE 300, SAN DIEGO CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. LIVING LEGACY FINANCIAL INSURANCE SERVICES LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License Number – 0F64319, AR Insurance License Number – 9233390.