Sighting: The Case for Actively Managed Funds

In the United States, assets have shifted away from actively managed funds and towards passively managed index funds and ETFs; specifically, less than 8% of the assets in equity funds were passively managed in 1997, but over 40% were passively managed in 2017.... The conventional wisdom [is that active management does not create value for investors]. That wisdom is based on [research showing] that: (1) The average fund underperforms after fees. (2) The performance of the best funds does not persist. (3) Some fund managers are skilled, but few have skill in excess of costs....

Taken as a whole, our review of current academic literature suggests that the conventional wisdom is too negative on the value of active management. [Multiple studies suggest] that active managers have a variety of skills and tend to make value-added decisions, such that, after accounting for all costs, many actively managed funds appear to generate positive value for investors. While the debate between active and passive is not settled and many research challenges remain, we conclude that the current academic literature finds active management more promising for investors than the conventional wisdom claims.

— From “Challenging the Conventional Wisdom on Active Management: A Review of the Past 20 Years of Academic Literature on Actively Managed Mutual Funds,” by researchers K.J. Martijn Cremers, Jon A. Fulkerson, and Timothy B. Riley. Read the Entire Article

Sighting: Safeguarding Your Wealth From the Effects of Cognitive Decline

The aging brain isn’t well-suited to financial decision-making. A growing body of research shows that cognitive decline starts to reduce our ability to make good decisions about credit in our mid-50s, and our investing decision-making skills fall significantly after 70. This cognitive decline leaves older people vulnerable to financial fraud and abuse. Combine that with several other trends and you have a perfect storm of financial risk: the increasing reliance on self-managed retirement income through individual savings and 401(k) accounts, growing use of debt by older households, and more problems with computer security and hacking.

But there...are proactive steps you can guard against these risks. The protective steps are worth considering for yourself—but also for aging parents who could be vulnerable. Here’s a checklist of steps to consider.

  • Get an Early Start
    Procrastination is your worst enemy, since the onset and progress of cognitive decline is difficult to predict.
  • Simplify
    Consolidate accounts and simplify the structure of your portfolio wherever possible, so that a trusted financial adviser or family member can easily keep tabs on things for you if the need arises.
  • Manage Passwords
    Aside from account monitoring, strong passwords are another must for protection against hackers. Use a password management service such as LastPass or Dashlane. These services serve as a sort of encrypted vault for login credentials.

— by Morningstar columnist Mark Miller. Read more