Passive or active investing: what the research says and doesn't

Friday dinner. Between the soup and the chicken, someone at one end of the table says, "Only passive. Anything else is paying more to get less." From the other end: "Nonsense, you need a manager who knows what they're doing, or you're just dragged along by the market." Both sound completely sure. You're in the middle, passing the salad, nodding in both directions.

That night you open a video, and it says a third thing. The conclusion that settles in is "we probably don't understand enough to know who's right". Two familiar paths grow from it: look for the expert who will settle it for you, or jump between camps depending on the last speaker you heard.

Part of you wants a simple answer, and some quiet. Part of you would rather not give up the hope that someone clever will beat the market for you. That hope is protecting something: if someone else is in charge, you won't have to face the swings yourself, the red month, the question of what to do now. Both are understandable. This article won't pick a camp for you. It shows what the research actually measures, and what it doesn't say.

The debate looks like a belief, but it's a measurable question

The confusion is natural, and not your fault. Each side brings the year, the fund or the chart that suits it, so both sound right. But the question "do active managers beat their benchmark?" can be measured, and has been for many years.

The best-known research is the SPIVA reports from S&P Dow Jones Indices, published since 2002. They measure what share of actively managed mutual funds lagged their benchmark over periods from 1 to 15 and 20 years, after costs, in the United States and the other regional markets the report covers. Read the figures themselves in the latest report on the S&P Dow Jones Indices site, with their date, since they change with every report.

The mechanism behind the findings is simple: the cost is fixed, the outcome varies. The management fee comes off every year, good or bad, while a manager's edge has to repeat itself to cover it. The same firm publishes a Persistence Scorecard, which checks whether funds that led in one period stay on top in the next. Its recurring finding, also on US data, is that few do. There's a separate article on chasing top-performing funds.

How do you read a report like this without getting swept along? Four questions: what does it measure, against which benchmark, in which market, and over what period.

Three things the research doesn't say

It doesn't measure your pension. SPIVA is about mutual funds in the US and the markets it covers, not Israeli pension, keren hishtalmut or kupat gemel tracks. In Israel the question also lives inside long-term savings, in index-tracking tracks versus managed ones, and the relevant data there is published on Gemel-Net and Pension-Net, run by the Capital Market, Insurance and Savings Authority.

It doesn't say passive investing is safe. A fund that tracks an index falls with it, fully. Passive describes how the money is managed, not how much risk it carries.

It doesn't say what suits you. Not your time horizon, not the fees you actually pay, and not what you'll do in the month everything is red.

You don't need to pick a camp. You need to understand what each way costs and what it asks of you.

Reading a report without joining a side

What you're after is being able to read a report on managed funds and say what it measures, in which market, and what it doesn't prove. Without picking a camp, and without changing any track because of one article. What people describe once they understand this is that they ask first about fees and about their own behaviour; whether and what to change is your decision.

Three questions instead of a camp

Choosing a track, transferring, or withdrawing from a kupat gemel or keren hishtalmut counts as pension advice under Israeli law when it's given to a specific person; this article describes how the instruments work, and a licensed pension adviser can look at your own case.

Question 1: what does it cost us?

Take each account's quarterly statement and write down both fee rates, on deposits and on the balance, side by side. A gap between rates looks tiny on paper, so it's worth seeing what it does over time. The return in the block below is an assumption only, 4% a year, deliberately modest, and not a forecast; it shows what a fee takes, not what you'll earn. The full arithmetic is in management fees.

What a management fee takes over the years

Yearly fee on the balance0.5%

What the fee takes over the years

₪128,515

₪1,422,348 at the end with the fee, ₪1,550,864 without it

The rate here is an assumption for the example, not a forecast.

Question 2: what did we do the last time the statement was red?

Sometimes the most important figure about an investment isn't the investment's, it's yours. An approach you can't hold through a hard stretch can cost you more than a difference in fees.

The behaviour check

The last time your quarterly statement showed a drop, what did you do?

Pick the answer closest to yours. There is no wrong one.

We didn't open itWe opened it, panicked, and thought about switchingWe switched tracks that same weekWe changed nothing

Question 3: do we understand what's held for us?

Map where the question already exists for you: the pension fund, the keren hishtalmut, the kupat gemel. Next to each, note whether the track tracks an index, is managed, or you don't know. Tracks and average fees can be checked on Gemel-Net and Pension-Net, and the tracks themselves have their own article, on pension investment tracks.

In AlphaHome: On the pension and long-term savings page, every account's fees sit side by side as you typed them from the quarterly statement, with balances totalled for the whole household. You can link an account to its fund in the public data.gov.il datasets, and the fund's published average fees then appear beside yours, as a table with no verdict.

When one sentence tries to move the decision

The line: "One year the managed fund won big, and I wanted to switch." How to answer it: You wanted a winner, and behind that sits the hope that someone will do the work for you. That's understandable. Today: go back to what the report measures, and remember that one year isn't it. Next time: the three questions are written down in advance, and you ask them before any switch.

The line: "I read that passive is dangerous because everyone's in it." How to answer it: The fear of being one of the herd is completely understandable. Today: ask what exactly the risk is, and who measures it. Next time: don't decide on the day you read the headline. Those days have their own article, on investing when the news is scary.

The next speaker at the table

Whoever chooses by the most convincing speaker switches camps every time a new speaker turns up, and there will be one at the next Friday dinner. Whoever can read the research hears both, and asks three questions instead of guessing who's right.

"Not knowledgeable enough" was the feeling of standing in the middle of a debate without knowing what it measured. Once you know what each way costs you and what it asks of you, the next speaker is one more opinion, not one more reason to switch.

This week: type each account's fees from its latest statement into AlphaHome, and on a sheet of paper mark each one "tracks an index", "managed" or "don't know". Every "don't know" is a question for the managing body, or a check of the track on Gemel-Net and Pension-Net.