Investing can be comparable to sports in that both reward strategy, discipline, and patience. Take Hall of Fame pitcher Greg Maddux, for example. He dominated not with the fastest fastball or eye-popping strikeout numbers, but with precision, consistency, and an unwavering game plan—qualities that carried him to 355 wins and four consecutive Cy Young Awards. His success came from mastering the fundamentals and long-term consistency, lessons that applied to any investment strategy.
At a basic level, investing strategies generally fall into two broad categories: active and passive investing. Active investors try to beat the market by sensing market trends to pick winning stocks and trade frequently, while passive strategies try to capture the returns of global markets in their entirety.
For many, active investing can sound enticing, offering the thrill of outsmarting the market and the allure of outsized gains. But in practice, consistently identifying the right opportunities at the right time is difficult and costly—even for seasoned professionals with vast resources at their disposal.
Some of the most brilliant investing minds in history have chased their “best ideas”—only to watch them unravel. Star managers have poured resources into a single stock, sector, or timing strategy that looked unbeatable at the time, but ultimately lagged the broader market. The dot-com boom, the housing bubble, and even more recent fads like meme stocks all remind us that what feels like the smartest move in the moment often isn’t the most durable path to building wealth.
Passive investing focuses more on emulating the performance of a particular market, often through diversified investments and products like mutual funds or ETFs. Though tame in description compared to the excitement of chasing the next “big winner,” the long-term data tells a clear story: broad, low-cost market exposure has outperformed the vast majority of active managers over time. By reducing trading costs, avoiding concentrated bets, and allowing compounding to work uninterrupted, passive investing provides a steadier and more reliable path to building wealth.
Our view aligns with this overwhelming evidence showing that passive investing is a smarter approach, particularly when the goal is building long-term growth, minimizing expenses, and increasing tax efficiency.
Active Management: a High-Stakes Gamble
Active managers operate under the assumption that they can forecast the actions of the market more effectively than the wisdom of millions of investors. They buy and sell constantly and are always responding to news articles, economic changes, or gut feelings. The problem with this is that it’s extremely tough to outperform the market. Consider these factors:
● Active investing is costly –the increased expenses of active investing consume profits. Active funds collect more in fees (usually 1 percent or more) to fund research, trading, and the salaries of managers. These fees accumulate over decades, and investors are left with a much smaller amount than in a low-cost index fund.
● Active investing is not tax-efficient. Capital gains taxes are incurred when transactions are made frequently, and thus, they can consume returns, particularly for those with a high net worth in a high tax bracket.
● A majority of active funds underperform. According to S&P Dow Jones Indices’ recent SPIVA Scorecard, over the past 15-year period, there were no categories in which a majority of active managers outperformed the market.
Further Evidence: Passive Investing Wins
It is not a coincidence that active managers have underperformed consistently in past decades. The evidence shows that after a long-term window, very few active managers can beat the market after adjusting to account for fees, trading costs, and taxes.
● Morningstar’s recent annual report found that less than one-quarter of all active funds beat the average passive fundover a 10-year period.
● According to Vanguard, it is highly unlikely that an investor can pick a winning active fund, especially when the investor chases performance rather than sticking to a disciplined plan.
● The data from a recent SPIVA Persistence Scorecard reveals that in the unlikely event that active investing outperforms the market, it tends to be the result of luck rather than genuine skill. In other words, strong returns in a given year do not increase the odds of strong performance in subsequent years
● Warren Buffett famously bet $1 million that a simple S&P 500 index fund would beat a selection of hedge funds over 10 years. His investment won by a landslide.
Although active investing sometimes performs well over shorter periods, passive management wins the long game in helping investors accumulate wealth for retirement and build a lasting legacy.
Passive Management: Let the Market Work for You
On the other hand, passive management takes away the guesswork by remaining grounded in evidence-based, long-term investing. Rather than trying to speculate on individual stocks or time a fluctuating market, passive investing is based on comprehensive diversification with less buying and selling. It involves building a diversified portfolio designed to emulate the performance of a broad market index, like the Russell 3000 or a bond market index, rather than trying to beat it.
● Instead of trying to pick individual “winners,” a passive portfolio offers broad market exposure, designed to capture the performance of an entire asset class or market segment.
● With its low turnover rate, passive investing also incurs lower fees. Passive funds typically charge a fraction of the fees of active funds. Over 20 or 30 years, that difference can mean hundreds of thousands in extra wealth.
● Passive funds are more tax-efficient. Because passive funds trade far less, investors encounter fewer taxable events. This can significantly improve after-tax returns.
● The client is at the center of the passive philosophy. Thus, an advisor can be more “active” when it comes to customer service, financial planning, and the controllables. In other words, a passive investment philosophy focuses time and effort on things that can add value and avoids unforced errors by not wasting time, energy, and fees with stock selection or market timing.
The Bottom Line: Play the Long Game
Active investment management attempts to sell an illusion of outperforming the market, but the evidence shows that passive investing is a smarter and more reliable way of accumulating wealth. Don’t try to outguess the market. Build portfolios based on decades of research and real-world performance, harnessing long-term growth with low-cost, tax-efficient strategies designed for investors who value certainty over speculation.
Much like Greg Maddux’s pitching style, disciplined and prudent approaches to investing may not grab headlines, but there is something much more important to be gained: consistency, transparency, and long-term growth.
If you’re curious about a more trustworthy and cost-effective method of investing, reach out to Passive Capital Managementand learn how our philosophy can assist you in pursuing your long-term objectives.