How does this return matrix show that passive investing is better than active? Is there a comparison between active and passive funds?
Yeah, but still if you have broad diversification in asset classes weighted by market cap, it should be all fine. The only drawback is that maintaining broad asset class diversification is (a) costly, (b) pain in the butt (if you rebalance).
By the way, here you have some good article speaking against active management and against market timing: https://www.flynt.io/downloads/FLYNT_Quarterly_Q3_EN_2017.pdf
Bond market is several times bigger than the stock market. And real estate is bigger than both combined.
If you really want to weight assets by market cap, you’d have only a small percentage in stocks.
You’re right. Asset classes should be weighted by risk tolerance of the investor, but still I think it should be as broad as possible (up to some reasonable total TER and time-consuming and complexity level).
What do you mean with several time? I0ve found that nowadays the total bond market is around 100 trillion, while global stock market is 64 trillion. So an assett allocation 60% bond / 40% stocks would match perfectly global allocation.
Not that I’m suggesting to do it, I’m just curious about the “several times bigger”. Maybe you have other data.
“According to some estimates, the global bond market has more than tripled in size in the past 15 years and now exceeds $100 trillion. By contrast, S&P Dow Jones Indices put the value of the global stock market at around $64 trillion.”
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@nugget’s chart made me think how to diversify my portfolio. With VT I already invest in international and US-based, small, medium and large cap stocks. With BND I have aggregate bonds. I wonder how can I add to my portfolio Commodities, TIPS and REITs. Any ideas?
you can get started here:
https://investor.vanguard.com/etf/list#/etf/asset-class/month-end-returns
there you fine VTIP, VNQ
for commodities i dont know any better than justetf.com
however since i am 100% stocks myself, i didnt look deep into TIPS, REITs and commodities.
when i thought about REITs, i concluded that any company in some fund will already be in VTI, same as mining companies.
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I would like to agree, but tell this to Warren Buffett. Have you seen the total return of Berkshire Hathaway? It’s mindblowing. Even in the recent years they still manage to beat the S&P 500.
Well, the question is how many people have the luck, resources and knowledge of Warren Buffet? I think 90% of the investors don’t.
Check out for instance this one:
https://www.bloomberg.com/view/articles/2017-03-09/does-warren-buffett-not-understand-risk-adjusted-returns
The guy seems to try to justify hedge funds, but the data he provides show that not only returns of S&P500 were better from most hedge funds, but even risk-adjusted returns (1 out of 5 had higher Sharpe ratio than S&P500). And hedge funds were created exactly to have better risk-adjusted returns. That’s the whole point of investing in hedge funds.
I’ve heard that hedge funds make more sense when there’s a lot of volatility in the market, but apparently it’s not easy to figure out when we’ll have such circumstances (the last such year was 2008). It’s pretty funny to see this sophisticated stuff with best in the world active managers loosing with the simple S&P500 index fund over the last 9 years.
PS. Here you have the story of the guy who lost the famous bet with Buffet over hedge funds vs S&P500:
https://www.bloomberg.com/view/articles/2017-05-03/why-i-lost-my-bet-with-warren-buffett
if you have just enough people attempting to beat the market, the chance for somebody to actually do it approaches 100%. if you look at their average or median performance however, the passive low cost approach takes you ahead.
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There is what Warren Buffett says, and what Warren Buffett does; and they are not the same!
Buffett is a massive public figure, and in his position, he knows that a big proportion of his public has not much knowledge in investing. Therefore, he knows that it would be suicidal to advise them to go active, and I won’t blame it for that 
As said before, the issue of most hedge funds is their greedy fees structure.
Therefore, if someone wants to beat the market, I don’t think it is a good idea to invest in a hedge fund.
The alternatives are then :
-Do it yourself (although I would highly recommend against that if you don’t know what you are doing)
-Invest part of your folio in Berkshire
-Find one of the proven successful managers over the last 25 years: Buffett (Berkshire Hathaway), Monish Pabrai (Pabrai Funds, Dalal Street ), Jeffrey Ubben (Value Act)…
and copy their portfolio thanks to their 13F report they file quarterly. Exemple for Berkshire : 13F filing
And as usual, disclaimer : those are just ideas and not actual investment recommendations 
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In recent years they become much less greedy, as the competition was rising, but the performance still remained weaker than S&P500. I think most individual active investors have even worse performance than hedge funds. Hedge funds are managed at least with proper resources and knowledge by skillful elite of top financial managers.
That would not make me at ease either 
Let’s not forget that Long Term Capital Manager had 2 Nobel Prize of economics (Myron Scholes and Robert Merton) , as well as John Meriwether (the rockstar of bond traders at Salomon Brothers) and other elites. We all know what happened…
Problem with some “elites” is that they trust their models too much. At LTCM they were following blindly mathematical models, which were working well, except in cases where markets are not efficient anymore (and thus they did not forecast the huge liquidity squeeze that killed them). Plus, they were very stupidly leveraged…
Note that this liquidity issue is also a very risk for ETFs (less for index funds like classical Vanguard). An ETF is only as liquid as its less liquid stock, and sometimes, this can lead to nasty surprises like the ETF flash crash of August 24th 2015 …
On the English Forum the very popular choice for an actively managed fund is Fundsmith. I must say I like their principles, but I’m still not convinced.
I like the comfort of index investing, because you don’t have to rely on trust, it eliminates the human factor. But the temptation is always there. The index investor performance is just average. 7.18% annual return gives you 700’000 return for 100’000 invested after 30 years. with 14% the return is 5’000’000. Imagine yourself 30 years ago, you could have gone for S&P500 or Berkshire. One would have made you financially independent, the other would have made you a millionaire.
Certainly among financial experts you have a Gaussian curve of spectacular failures (LTCM), median results (usually on long-term and after costs worse than S&P500) and spectacular successes (Buffet). On average, however, I’d still say that professional active managers employed with huge analytical and financial resources have better performance than layman active investors employed with pure luck.
The problem is 30 years ago you would not know that Buffet will be so successful for such long time. If you picked among so many funds one that is successful for 30 years, you practically won on lottery. What is the chance that you can make such pick for next 30 years. I think it’s very, very low.
Another advantage of passive investing is that you know at every moment, which stocks you own.
Also investing in active funds is a lot riskier in the long run. A lot of funds are bankrupted or closed each year.
On this document https://personal.vanguard.com/pdf/s362.pdf on top of page 5, 449 funds have been liquidated between 1997 and 2011. You never know if your pick a winner, a future liquidated or an underperforming fund.
Moreover, I am quite sure that active funds have less diversification than a world or US index.
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Sorry to disagree on this one. Let’s go back 30 years ago : 1987. Buffett was already 56 years old and had a track record of 31 years of outstanding returns (He started his investment partnership in 1956). More over, his yearly compounding was even more impressive that today : at the time, he had been compounding at 29% annually since the beginning.
Now, call me as you like, but when I see 30 years compounding at almost 30% annually, i tend to think that it is not due to luck. If he was really part of a gaussian distribution and only a lucky guy blessed by the survivorship bias, how many random investors would you need to be sure that at least one Buffett is among them? How many chimpanzee throwing randomly darts on the wall street journal to pick stocks would you need, so at least one of them has the same results as Buffett? Too many to just say “Well, Buffett is just a lucky bastard”.
I agree that Efficient Market Hypothesis is in general a good rule of thumb but please don’t be more dogmatic than needed. Sometimes, really wise people like Buffett and Munger can spot when markets are not efficient and this is how they made such a fortune. Of course, it is very hard to do. But I am curious to know the probability of a random investor compounding 30 years at 29% only by pure luck.
I’ll end with this quote from Munger :
Efficient market theory is a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. In fact one of the economists who won — he shared a Nobel Prize — and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isn’t quite as efficient as you think, he said, “Well, it’s a two-sigma event.” And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas — better to add a sigma than change a theory, just because the evidence comes in differently. [Laughter] And, of course, when this share of a Nobel Prize went into money management himself, he sank like a stone.
So while probably most of us should stick to passive investing, please don’t be so quick to discard guys like Buffett.
EDIT : I made a rough calculation : between 1956 and 1987, market returns standard deviation has been 16,5%. Buffett’s returns, at 29%, are thus 1.75 times the standard deviation. For one year, the probability of falling in this category only by luck is [0.0401] (Normal Distribution). That makes 1/24,9. So over 30 years, the probability is 1/(24.9^30) = 1 divided by 8.04E41 !
To put it in perspective, you would have four time more chances to pick randomly the exact same single human being (among the 7 billion humans in the world) 4 times in a row.
Sorry, but anyone aware of Buffett’s results in 1987 would have been foolish to not invest with him at the time.