Passive Investing in Charts

Simple charts illustrate passive and active investing. A new documentary, “Tune Out the Noise,” which The Wall Street Journal calls “a nerdy and genuinely engrossing documentary about investment strategy,” might interest finance and other business students.

These two charts show the total net assets and the net asset flows of active and passive investments over time. The area chart is a useful way to illustrate the percentage of total assets, while the line chart illustrates dollar value over time, clearly showing a shift beginning around 2005.

This might be an opportunity to explain the difference between active investing (trying to outperform the market, which may involve frequent moves and higher costs) and passive investing (buying and holding stocks for the long term, often in index funds with lower fees). A WSJ article raises questions of humility for active investing:

Picking stocks is at heart an arrogant act.

It requires in the stock picker a confidence that most others are dunces, and that riches await those with better information and sharper instincts.

A class activity or assignment could ask students to research and create visuals for active and passive investments over time. Results seem to vary by asset class. For example, a recent Morningstar analysis found higher long-term success rates of active investing in real estate, bonds, and small-cap equities, and the lowest rates in U.S. large-cap equities.