Please forward this error screen to 192. Please forward this error screen to sharedip-23229174135. I am delighted to welcome a new occasional contributor to Monevator! Even professional fund managers who have demonstrated skill in picking stocks in the past struggle to beat active vs passive investment management market once their high costs are taken into account.

This may sound like a counsel of despair, but it’s just a call to accept reality. You don’t need to beat the market to invest successfully in shares and other assets. But you do need to try to get the average return from the different asset classes as cheaply and effectively as possible. As a Rational Investor you realise you can’t outperform the markets, neither do you know someone who can. Think about your other assets in a portfolio context.

Think hard about your risk levels. Implement the portfolio as cheaply as possible. Keeping costs low is vital to being a Rational Investor. Since you are not going to try to outperform the market, it makes no sense to pay a penny more than you have to in order to achieve as close to the market’s return as you can.

Ironically, this will be your edge over those non-Rational Investors who are striving to do better. By keeping costs low, you can end up richer than those who pay a high price to try to beat the market and fail. Active management comes at a cost There are too few people from the world of finance who are interested in emphasising the importance of low fees to investors. Fees are always important in finance, but even more so for the Rational Investor. Since we don’t think we’ll be able to outperform the market, we’re not asking anyone to be particularly clever about investing.

We just want someone to replicate the market. As a result we should expect to pay very little for it. It either makes us leave our investments where they are or makes us buy the well-known active funds like so many others. Many people are aware of the extra costs of these active funds, but often they don’t seem to act on it. It seems paradoxical that people spend countless hours comparing the price of computers or holidays, when the same time spent researching better and cheaper financial products would far outweigh the cost savings they make elsewhere.

The price of active management The following table compares the cost of investing in a passive index-tracking product with investing in a typical active fund tracking the same index. Additional taxes may be payable with some even more active strategies. How much of a difference would you expect your decision to invest in an index tracking product as opposed to an active fund to make? Where does this leave you in our example? Well, as you get ready to retire at age 67 after 42 years of diligent index tracking, the difference in your savings pot is staggering compared to somebody who invested in active funds. 643,000 by investing with an index fund as opposed to with an active manager.

That demonstrates the advantage of at least avoiding the initial charge. If you had avoided the up-front charge AND if there had only been a 1. If you think you have great edge in the market and you could easily make up this 1. If you don’t have an edge, then the sooner you get out of the expensive investment approaches and into cheap index tracking products, the better off you will be. Note: Shouldn’t I expect an active fund to make higher returns?