Among investors—both professionals and working savers—the relative merits of active vs. passive management have been debated at least since John Bogle rolled out the first index mutual fund in 1975. Well-known value investor Martin Whitman, for instance, famously remarked that “diversification is a surrogate—and a damn poor surrogate—for knowledge, elements of control [of a company], and price-consciousness.” The debate is not nearly so heated amongst European economists, however. In a recent poll of European economic experts by Chicago Booth’s Initiative on Global Markets, respondents were unanimous in their agreement that investors with a concentrated equity portfolio will underperform investors who hold low-cost, passive index funds.

An individual investor with no inside information, the economists say, is unlikely to have much of a stock-picking edge. Hans-Joachim Voth of the University of Zurich went even further, commenting that even investors in managed funds, which would also presumably be well diversified, will see whatever excess gains they might earn eaten away by fees.

John Vickers of Oxford offered a caveat, pointing out that “… some investors might rationally want some exposure to assets not available passively.” Still, risk-averse investors are better off pursuing the market return, says the panel, suggesting faith in an individual stock pick is faith in the face of contrary evidence.

Peter Neary, Oxford
“A small industry exists to help naive investors beat the market. It should be subject to mandatory health warnings.”
Response: Strongly Agree

Per Krusell, Stockholm University
“I don't know of any convincing systematic evidence to the contrary.”
Response: Strongly Agree

Olivier Blanchard, Peterson Institute
“This is a no-brainer. The only qualification is that the diversified portfolio may not be exactly the market portfolio.”
Response: Strongly Agree

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