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What You Pay, What You Get: Connecting Price and Expected Returns

Within investment there are considered to be two broad camps; Active Managers, and Index Trackers.  This is however, as with so much of modern life, an oversimplification.  Whist the evidence to support Active Management is at best patchy, and definitely non conclusive; there are also problems with indexing, with the possibility of Active Managers being able to 'game' an index by buying stocks which are about to be incorporated.  In addition to this identified problem in the attached article, Jake DeKinder, Vice President at Dimensional Fund Advisors highlights another issue with index tracking in that the index is only updated periodically, and in the meantime is effectively ignoring news coming in from the market.

We do not believe that Active Managers offer good value for money, but often simple indexing is too basic a strategy to effectively capture value in a complex world.  Evidence based investment, doing what works, is the best way to invest over time - seeking to capture returns when they become available whilst targeting a consistent and persistent level of risk commensurate with your ability to withstand the bad times, which will sadly inevitably occur.

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by John Stirling