Halloween trick or treat: index vs active

You've seen me mention many times why passive investing through index funds like Vanguard S&P 500 makes sense. Here's some evidence from the Wall Street Journal. The Journal notes that the Vanguard S&P 500 Index Fund captured 98.96% of the value of the market during the most recent 10 year period. Active large capitalization funds, on the other hand, only captured 80.57% of the value. That's a staggering difference!

Here's why this happens: Active funds actively trade stocks and pay commissions to brokers for each transaction while Index funds predominantly buy and hold positions, thereby minimizing trading costs. Active funds pay salaries, commissions, marketing and research fees while Index funds have much lower costs. Active funds have to maintain a cash balance to be able to meet redemption requests (meaning that less than 100% of the fund is invested in stocks) while Index funds are fully invested.

So which makes better sense to you? Happy Halloween!