MANY OF THE WORLD’S religions view humility as an admirable trait to which we should all aspire. It’s frequently associated with poverty, as practiced by devout orders like Buddhist monks and the Sisters of Mercy. But when it comes to investing, humility can—ironically—make you significantly wealthier.
As documented by the behavioral finance research, overconfidence can lead to worse investment returns when investors presume, without justification, that they’re skilled at, say, picking market-beating stocks. The research on indexing versus active stock fund management overwhelmingly shows that,
INVESTMENT RESEARCH has overwhelmingly shown that active stock strategies perform poorly over long periods compared to buying index funds and simply collecting the market’s return.
There’s still some debate about whether the best active managers are a smart bet—and whether we can count on them continuing to perform well. But there’s no question that active stock management, on average, has destroyed value for clients.
Yet active strategies remain popular with both individual investors and their wealth managers.