Recent defenses of couch potato investing by Canadian Couch Potato and Canadian Capitalist left me wondering why so many people believe in active investing strategies. I think it may be partly due to the feeling that you will be successful if you work hard.
It may take some work to pick a passive investing strategy, but once started this approach is quite easy to maintain (which is why we call it “couch potato” investing). On the other hand, active investors work to try to beat the others who play the same game. Active stock pickers pore over company reports and calculate company valuations. For them investing is usually hard work.
The thing that goes contrary to our expectations about hard work is that active investors, on average, get lower returns than the market averages. It’s not that they don’t get enough benefit to justify the work they do; it’s that they actually make a negative wage for the hours they put in. At least this is true of the average person who invests his or her own money actively. Professional money managers get paid whether they perform well or not.