Broker Check

"Passive" investing outperforms "active" investing at potent

| October 10, 2013

*Note: Please see excerpted client brochure and academic research cited below to support this material and the title statement.

Here are my conclusions on the passive investing choices that I offer . . .

1) Your Goals: 
Focus is on your goals – your financial / retirement plan.

2) Passive investing

a) Does not try to “pick winners.”

b) Does not “time the market.”

c) Lowers risk (compared to active investing of the same category.)

d) Lowers cost (generally.)

e) Does not require you to be more invested in stocks than you need to be to meet your goals.

f) Properly implemented passive investing helps prevent individual investors from making bad mistakes!

Source: Dimensional Fund Advisors --

3) Cetera Investment Management offers “Enhanced Passive” investing:

a) “through well-diversified portfolios, carefully structured according to risk tolerance and then periodically rebalanced to meet the changing economic landscape.”

b) “All Cetera Investment Management passive portfolios strive to:

---Offer a sound, proven and repeatable asset allocation process.

---Carefully manage exposure to risk,

---Deliver low-cost investment exposure.”

[Source: attached Cetera Passive Overview brochure]

4) DFA (Dimensional Fund Advisors) offers Asset Class Investing

a) Research-based.

b) Very low turnover – still passive.

c) DFA “tweaks” “pure” indexing to provide Asset Class Investing, a passive investing strategy preferred by many of their large institutional clients.

d) Regarding low costs . . . as quoted in the attached “Fundamentals of Asset Class Investing” brochure, where you can see the referenced chart on page 13: 
“As you can see from the chart on the right, the average expense ratio of a DFA Fund — about .43% is significantly lower than the .67% average of passive funds and substantially lower than the 1.26% average for actively managed funds.”

[Source: attached Fundamentals of Asset Class Investing brochure]



PS: Please call or email me for a Written 2nd Opinion and specific investment recommendations for your retirement goal & risk level.


Passive Investing: “An investment strategy involving limited ongoing buying and selling actions.” (

Active Investing: “An investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions.”

Investopedia explains ‘Active Investing:’ “Active investing is highly involved. Unlike passive investors, who invest in a stock when they believe in its potential for long-term appreciation, active investors will typically look at the price movements of their stocks many times a day. Typically, active investors are seeking short-term profits.” (

Academic research in support:

“As the Nobel Laureate in Economics, William Sharpe conclusively demonstrated in a ground-breaking paper:

“ must be the case that

1. before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and

2. after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar

These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.”*

Looked at in the clear light of simple mathematics, after fees and costs are deducted, active management becomes a losing game in which the expected outcome is negative, in which the odds are stacked against the average participant. In other words, while some active managers will win, the majority will necessarily lose. (emphasis mine: ed.) The math is inescapable, so it isn’t surprising as the chart on the next page shows, over the last five years, most active managers underperformed their benchmarks.”

*William F. Sharpe, “The Arithmetic of Active Management,” The Financial Analysts’ Journal Vol. 47, No. 1, January/February 1991. pp. 7-9 

Source: As found beginning on page 5 of the attached brochure: “Fundamentals of Asset Class Investing” provided by (

Fundamentals of Asset Class Investing

Cetera Investment Management

Design Build Protect