Index fund vs. active fund

Perhaps the most important investment decision: try to beat the market (active) or simply buy the market (passive)?

Active fund:

• A fund manager picks shares and buys and sells actively
• Costs: 1.5–2.5% TER per year + often a 5% front-end load
• Promise: beat the market ("generate alpha")
• Reality: over 90% fail in the long run

Index fund/ETF (passive):

• Automatically tracks an index (e.g. MSCI World)
• Costs: 0.10–0.22% TER, no front-end load
• Promise: deliver exactly the market return – no more, no less
• Reality: thereby beats over 90% of professionals

The SPIVA study (hard facts):

• 5 years: 75% of active funds worse than their index
• 10 years: 85% worse
• 15 years: over 90% worse
• And: the few that succeed CANNOT be identified in advance

Cost comparison (€100,000, 20 years, 7% gross return):

• Active fund (1.8% costs): ~€280,000 final value
• ETF (0.2% costs): ~€365,000 final value
• Difference: €85,000 – just from lower costs!

When active funds STILL make sense:

• Niche markets (e.g. specific emerging markets)
• Special strategies (e.g. distressed debt)
• For 95% of private investors: the ETF is the better choice