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Economists are always right within their own narrowly-defined models! Yes, if you pre-define a set of securities that you will forever be limited to exclusively
by kolbe 9y ago
Economists are always right within their own narrowly-defined models! Yes, if you pre-define a set of securities that you will forever be limited to exclusively trading, and divide two groups into passive (never makes another trade again) and active (makes trades), the two groups will perform equally (excluding fees).
Now, in the real world, there are several significant reasons why that model model offers nothing but a fun little thought experiment.
- mannykannot 9y agoThis does look too contrived to be meaningful, but the author claims that it is an example of a general rule identified by Fama and Sharpe: "The aggregate performance of the active segment of a market will always equal the aggregate performance of the passive segment." (before frictions like trading costs and taxes are taken out.) I hope those economists have a more sound basis for this claim than the author gives here - assuming, of course, that the author of this article is not misrepresenting or misinterpreting them. To take an extreme case, if all the passive investment is in a single asset, I don't see how this could be, and an issue with passive index investing is that it is in a limited set of assets.