Market Randomness and Active Management
Markets are moved by news. News is unpredictable and random by definition. Therefore, the markets movements are unpredictable and random. However, this market randomness does have a positive average of about 10%/year because capitalism works. Active managers who have claimed to outperform a market average or index have also implied that they have the power to predict tomorrow’s news.
Skill or Luck
The average actively managed investment must under perform the indexed investment, when all costs are deducted. [source] Those actively managed investments that beat the indexed investments fail to consistently beat the index in the future. The reason for market beating performance in a random market is simply due to luck and not due to a skill that is repeatable.
Index Portfolios Best Capture Risk and Return1
Actively managing your money will create higher risk and lower returns than a globally diversified, tax-managed, and small value tilted portfolio of index funds. Due to commissions, management fees, margin costs, taxes, stock randomness, and market efficiencies, you will slowly transfer your money into the pockets of stock brokers, mutual fund managers, hedge fund managers, and the many other individuals profiting from your numerous transactions and your lack of understanding of free market principles.
Returns from the Risk of Capitalism Rank Highest
Capitalism is a great idea that has worked for centuries. It has provided an annualized return of about 10%/year since 1926 and has the highest rate of return of all investments tracked over periods of 50 years or more. That rate of return is explained by the difference between the low risk of capital and the high risk of capitalism.