Warren Buffet has won his bet that a passive investment index of the S&P 500 would beat a select group of investment fund managers, but that wager would not have played out as well as it did recently if he had made it in a bear market.
Timothy Armour’s recent article at CNBC explains why. Excessive fees and frequent trades are often a problem with managed funds, he acknowledges, but passive index funds expose investors to all the risks of bear market down turns.
The current bull market has continued for so many years now that a recent survey shows over 50% of investors think passive funds are safe. Since they haven’t seen a lengthy down turn, they dismiss the risks that they are exposed to by a passive investments.
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Despite Buffet’s winning his bet, managed funds do sometimes beat the broader market. American Funds has had several managed funds, according to Armour, that have grown investments faster than the S&P 500 in the past four decades.
Timothy Armour has been a director of Janus Capital Group, Inc. and chairman of AQR Funds since his retirement at Morningstar. He has served on the Board of Directors at Janus Capital Group, Inc., was the managing director at Morningstar for ten years, was president of the mutual funds division at Stein Roe & Farnham, Inc., and has sat on the boards of Janus Capital Management LLC, AARP Services, Inc., and ETF Securities.
Timothy Armor earned a BA in Business at Gettysburg College and an MBA from Columbia Business School.