Active and passivedraft

What the record shows

Both S&P Dow Jones Indices scorecards quoted on this page are the year-end 2025 editions, so every figure taken from them is measured as at 31 December 2025.

Statements that are mentioned in active and passive fund discussions

Three statements about active and passive investing, each set out with its method, the published critiques and the sources for both.

1. "Advice adds about 3% a year", or 5.6%, or any single number. Both figures are published by fund managers for use by advisers and are estimates. Vanguard says of its own 3% that it is not annual, is very irregular, and varies by client; the current edition of its paper puts the total at "Up to, or even exceeding, 3% in net returns" and says the opportunities arrive "intermittently". A critique published on Kitces.com by Derek Tharp in October 2017 adds two points: one component, the saving on fund costs, assumes the adviser moves the client into the cheapest few per cent of funds, and the figure is calculated before the adviser's own fee. It adds a third that survives every edition, that there is no counterfactual, "since we don't necessarily know how the client would have acted in the absence of an advisor". Russell Investments publishes its own Australian figure, which is larger, and whose behavioural component is a twenty year investor return gap rather than a single market episode. The 2023 report starts from the money moving into and out of United States funds each month, as the Investment Company Institute reports it, and solves for the single rate of return that fits those flows, which is an internal rate of return: 6.65% a year. It sets that beside the 10.04% a year earned by a holding in the S&P 500 left "without alteration from 1 July 2003 to 30 June 2023", and the 3.39 point difference between the two is the behavioural component. Sources Vanguard, "Celebrating Vanguard Advisor's Alpha", Advisor's Alpha Perspectives, 2025 edition, read 28 August 2026, for the current wording. The "not annual, very irregular" wording is the February 2019 edition's, which reads "We do not believe this potential 3% improvement can be expected annually; rather, it is likely to be very irregular. Further, the extent of the value will vary based on each client's unique circumstances". Vanguard has replaced that edition at its own address, so it was read on 28 August 2026 from the Internet Archive's capture of the address it was published at. Vanguard Australia's consumer page of December 2021 states the figure with none of those caveats: "Proprietary research by Vanguard titled Adviser's Alpha estimated that financial advice improved net returns by 3 per cent." Derek Tharp, "Can We Trust Research On The Use Of Financial Advisors?", Kitces.com, 4 October 2017. Russell Investments' Value of an Adviser series for Australia: the 2023 report, 5.9%, of which 3.4% is behavioural coaching; the 2025 edition, the eighth, which is where the 5.6% comes from; and the 2026 edition of 25 August 2026, which supersedes it at 5.5%: 1.5% asset allocation, 2.8% behavioural coaching and 1.2% tax. Russell's report is stamped "FINANCIAL PROFESSIONAL USE ONLY" and its disclosures add "It must not be shared with the end investor – the client of the Adviser." The critic has interests of the same kind as the two publishers: Kitces.com sells memberships, continuing education, conferences and training to advisers, and its disclosures page names XY Planning Network, AdvicePay, New Planner Recruiting, fpPathfinder, Focus Partners Wealth and Focus Partners Advisor Solutions among Michael Kitces's businesses.
2. "Investors lag the index by four points a year." The figure comes from DALBAR's Quantitative Analysis of Investor Behavior, known as QAIB, published each year and sold as a report. Each edition sets an average investor return beside an index return over the same window. DALBAR states that it measures monthly fund sales, redemptions and exchanges, which its glossary says the Investment Company Institute provides, and calculates the return as the change in assets once those flows are removed. On that description the average investor is an industry aggregate rather than a sample of accounts. The two sides of that comparison are computed on different bases. A fund's published return is time weighted: it follows one dollar left in place for the whole window, whatever money arrives or leaves. A QAIB investor return is dollar weighted: it weights each year by the money invested in it. A saver contributing monthly has the least money at work in the early years, so where those were the strong years the dollar weighted figure falls below the fund's own. A second difference opens where a fund is chosen on its record. In the United States, Carhart, examining US equity funds without survivor bias, found that "common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted returns", and that the only significant persistence left over "is concentrated in strong underperformance by the worst-return mutual funds", so what his model leaves unexplained is persistence at the bottom rather than the top. Fama and French found the aggregate portfolio of US active equity funds close to the market portfolio, with "the high costs of active management" showing up "intact as lower returns to investors", though the same paper finds evidence of both superior and inferior performance in the extreme tails once fund expenses are added back. On that evidence a fund picked on a strong record is expected to return about what active funds on average return, which after their costs is below the index, and none of that requires the investor to have mistimed anything. Three published criticisms turn on the first of those two differences. Wade Pfau, an economics doctorate, Professor of Practice at The American College of Financial Services and a principal of the wealth manager McLean Asset Management, argued in Advisor Perspectives in March 2017 that setting a dollar weighted investor return against a time weighted index return makes the calculation wrong. Harry Sit, who writes The Finance Buff, publishes no academic work and runs Advice-Only Financial, a paid directory of advisers who charge for advice alone, worked it through DALBAR's own figures on Kitces.com in October 2012: 3.49% a year for the average equity fund investor against 7.81% for the S&P 500 over the twenty years to 2011, a gap of 4.32 points, beside DALBAR's own dollar cost averaging benchmark of 3.17%, which the average investor finished above. Michael Edesess, a mathematics doctorate, adjunct professor at the Hong Kong University of Science and Technology in environment and sustainability and in finance, and chief investment strategist at Compendium Finance, published a related article in Advisor Perspectives in October 2017, and wrote The Big Investment Lie in 2007, which argues that the investment industry misleads its clients. DALBAR rejects the criticism, and answered Pfau in the same publication on 8 May 2017. Its reply of 11 October 2017 says QAIB "uses the actual balances in investor accounts each month", describes the error the critics claimed to have found as "(non-existent)", and lists eleven causes of investors trailing an index, beginning with non-uniform acquisition and withdrawal dates and including operating expenses and portfolio trading costs. DALBAR evaluates and certifies financial firms, and its home page carries the line "The nation's top financial institutions choose DALBAR" over the marks of Fidelity, Ameriprise Financial, TIAA, Voya Financial and Morgan Stanley. The full QAIB study sells for US$975 and an adviser edition for US$250 a year, which one adviser may customise and give to clients; a firm may buy the cover white-labelled with its logo at a price set by the distribution. Advisers who recommend index funds also quote it as evidence that investors damage their own returns. What the record supports is that such a gap exists and can be measured. The figure moves with the window, the index and the fund category: successive editions give 4.32 points for the twenty years to 2011 and 3.6 for the twenty years to 2015. It does not establish the gap as a measure of investor error, because dollar weighting and the funds' own costs each move it with no bad decision taken. Buying on a record that does not carry forward moves one investor's own result the same way, without any mistiming. One study has tried to isolate the timing part on a different gap and a different sample: Fulkerson, Jordan, Riley and Yan put the timing cost in Morningstar's Mind the Gap at 0.10 percentage points a year on Morningstar's own sample, against the 1.2 points Morningstar reports. No publication this practice has been able to find separates advised accounts from unadvised ones, so none of them measures the effect of advice. Sources DALBAR's own QAIB page, for what it publishes and that it is sold, its QAIB questions page, for the data sources, the prices and the branding licence, its QAIB glossary, for the calculation, and its home page, for the certification business and the firms named on it; DALBAR's reply of 11 October 2017, for the eleven causes and for its own words on the calculation, read from the EconoTimes syndication of DALBAR's release. Wade Pfau, Advisor Perspectives, 6 March 2017, where he also writes a monthly column, his faculty page at The American College of Financial Services, for the title, and his bio at McLean Asset Management, for the firm; Harry Sit, "Does The DALBAR Study Grossly Overstate The Behavior Gap?", Kitces.com, 3 October 2012, for the 1992 to 2011 figures, with NerdWallet for his own advice-only service, because his own pages refuse an automated read; the venue's contributor page states that it does not permit sales pitches, sponsored posts or videos. Michael Edesess, Advisor Perspectives, 9 October 2017, and his faculty page, read 28 August 2026, for the university posts and the Compendium Finance role; and Norm Rothery, MoneySense, 31 March 2017, for the twenty years to 2015 and for the summary of Pfau's argument, who holds a physics doctorate and publishes a value stock newsletter. For the evidence: Mark Carhart, "On Persistence in Mutual Fund Performance", Journal of Finance, 1997, and Eugene Fama and Kenneth French, "Luck versus Skill in the Cross-Section of Mutual Fund Returns", Journal of Finance, 2010, both quoted from the published abstracts; Jon Fulkerson, Bradford Jordan, Timothy Riley and Qing Yan, "Bad Timing Does Not Cost Investors 15% of Their Funds' Returns: An Examination of Morningstar's 'Mind the Gap' Study", Financial Analysts Journal, 12 May 2026; and Index Fund Advisors, for one such use. The two Advisor Perspectives addresses refused an automated read again on 28 August 2026, so Pfau's argument is given as Rothery's summary reports it, the Edesess article is named without its argument, and DALBAR's reply to Pfau of 8 May 2017 is named without a link for the same reason.
3. "The best performing accounts belonged to investors who had died or forgotten them", and "85% of speculators lose money." The first is usually told as a study by a large fund manager, most often Fidelity, which reviewed its own accounts and found the best results in accounts nobody was trading, because the owner had died, had forgotten the account existed, or was one of several heirs who could not agree. No such study could be found, and the check published in print reached the same conclusion. John Rekenthaler put the question to Fidelity for a Morningstar column of 6 October 2015: "My Fidelity contact has not heard of such a thing, nor has Morningstar's Fidelity Canada contact. Suffice it to say that none of these citations came linked to the original source." Two later pieces say the same in passing, a Motley Fool piece by Selena Maranjian in February 2025, whose headline states that the study does not exist, and a Monevator post of March 2021 that describes the story as apocryphal. Monevator was a link in the chain before it was a sceptic: the same column records that in June 2015 Monevator wrote that Fidelity had "released a study" to that effect, which is what took the story from something a blog reported to something said to be published. The earliest form that can be located is an anecdote rather than a study. On an episode of Masters in Business on Bloomberg Radio in 2014, James O'Shaughnessy told Barry Ritholtz that Fidelity had studied which of its accounts had done best and that the answer was the accounts of people who had forgotten they had one, attributing it to an employee who had recently joined his firm. Business Insider transcribed the exchange on 4 September 2014, and that is the version most later retellings follow. The word "dead" entered as the interviewer's guess in that exchange and the speaker corrected it. The disagreeing heirs appear only in later retellings, and the exchange names no figures, no period and no document. A second strand runs beside it, and it is the one that carries the dates: the same Morningstar column traces a Fidelity "internal performance review of customer performance from 2003 to 2013" in which the best accounts were "either dead or inactive", passed on through a blog, then a speech, then Monevator in June 2015. Work on the same question has been published. Barber and Odean, in the Journal of Finance in 2000, examined 66,465 households at one discount broker between 1991 and 1996, all of them self-directed accounts with no adviser. The households that traded most earned 11.4% a year after costs against 17.9% for a value-weighted market index, and the average household earned 16.4% and turned over about 75% of its portfolio a year. Before costs the average household earned 18.7%, so these households roughly matched the index and fell below it on the way through: the paper's own finding is that "it is the cost of trading and the frequency of trading, not portfolio selections, that explain the poor investment performance of households during our sample period". A study of turnover measures what trading costs rather than what leaving an account alone earns. The second statement circulates as a round number, and 80%, 85%, 90% and 95% all appear. Published loss rates exist for defined groups of traders and they differ by group: 81.4% of Taiwanese day traders over 1992 to 2006; 64.2% of a sample of 324 United States day traders over 1998 and 1999; and 97% of Brazilian futures day traders who persisted at least 300 days. No primary source establishes a single figure for speculators as a whole, and the round numbers in circulation are not tied to any of these populations. The attribution offered most often, to Thomas Hieronymus's work on futures accounts in the 1960s, can be checked further than the page previously said: the book is obtainable and no retelling gives a page reference, and the figure usually credited to it appears in a magazine essay of 22 September 1967 as an unattributed survey statistic, "Another survey, this one of 418,000 commodities transactions, turned up the fact that 75% ended in losses", printed beside a separate quotation from Hieronymus. Figures in that range do exist, but only in a specific area: regulators counting retail accounts in one leveraged product. The United Kingdom's Financial Conduct Authority reported in December 2016 that 82% of clients lost money in a representative sample of client accounts at contracts for difference firms, and named no measurement period. The European Securities and Markets Authority, announcing its 2018 product intervention, said that 74% to 89% of retail accounts typically lose money across national analyses, with average losses per client of 1,600 to 29,000 euros. ASIC reported that 68% of retail contracts for difference clients lost money in the 2024 financial year, more than 458 million dollars in total including 73 million dollars of fees, and that 70% of wholesale clients lost money, with net losses of 738 million dollars. Those three are what is known about one leveraged product sold in three markets over different periods. Sources Business Insider, 4 September 2014, for the radio exchange; John Rekenthaler, "In Praise of the Dead (Investors)", Morningstar, 6 October 2015, read from the syndicated copy because Morningstar's own archive could not be opened, for the check with Fidelity and for the second strand; The Motley Fool, 3 February 2025 and Monevator, 25 March 2021, each for its own passing conclusion that no such study exists; Barber and Odean, "Trading Is Hazardous to Your Wealth", Journal of Finance, 2000. For the loss rates: Barber, Lee, Liu and Odean, "The Cross-Section of Speculator Skill: Evidence from Day Trading", Journal of Financial Markets, 2014, whose figure is "81.4% of day traders in this sample lose money unconditionally"; Jordan and Diltz, "The Profitability of Day Traders", Financial Analysts Journal, 2003, where "208 traders (64.2 percent) had a net profit less than zero after commissions"; and Chague, De-Losso and Giovannetti, "Day trading for a living?", 2020 working paper. The last two are quoted from their published abstracts, because Taylor and Francis and SSRN both refuse an automated read. Thomas Hieronymus, Economics of Futures Trading, borrowable at the Internet Archive; the survey statistic from Time, 22 September 1967, whose archive refuses an automated read and which was read with a browser on 28 August 2026. FCA, 6 December 2016; ESMA, 27 March 2018; and ASIC media release 26-004MR with ASIC Report 828, "Risky business: Driving change in CFD issuers' distribution practices", 20 January 2026, which gives the figures to two decimals: 133,674 retail clients, 68.42%, $458.01 million of net losses and $73.29 million of fees. That no primary source establishes one figure for speculators as a whole is this practice's own search, of 17 August 2026 and again on 28 August 2026, and not a published finding.

Morningstar's "Mind the Gap"

Morningstar's "Mind the Gap" compares the return the average dollar in a fund earned with the return of the same fund, for United States mutual funds and exchange traded funds. The fund's published return is a time weighted return on a dollar left in place for the whole period. The average dollar actually invested earned a different rate, usually lower. The 2026 edition puts the gap at about 1.2 percentage points a year over the ten years to December 2025: the average dollar earned 8.7% a year against these funds' 9.9% aggregate annual total return. Morningstar's own series for the ten year periods ending in December 2021 to 2025 runs 1.7, 1.7, 1.1, 1.2 and 1.2 percentage points. A paper in the Financial Analysts Journal of May 2026 re-examined the same sample and put the part of the gap attributable to poor timing at 0.10 percentage points a year, so the size of the behavioural component is in dispute in the peer-reviewed literature.

Morningstar's Australian figure is much smaller: 0.40 percentage points a year over the five years to June 2023, measured on 869 Australian funds. Part of the gap comes from the timing of money going in and out rather than from investor decisions. In the current edition the narrowest gaps by category are United States stock funds at 0.4 points and allocation funds at 0.7, and the widest are alternative funds at 1.6 and sector equity at 1.2. Morningstar itself offers a reading of why the Australian and United Kingdom gaps are the smallest in its regional study, that "these markets are characterized by more holistic financial advice than the other markets included in the study", which is an interpretation of its own figures rather than a measurement.

Source Morningstar, "Mind the Gap 2026", published 6 August 2026, measured to 31 December 2025, for the United States figures and the series; and "Mind the Gap 2023: Investor Returns Around the World", 4 October 2023, measured to 30 June 2023, for the Australian figure. The re-examination is Jon Fulkerson, Bradford Jordan, Timothy Riley and Qing Yan, "Bad Timing Does Not Cost Investors 15% of Their Funds' Returns: An Examination of Morningstar's 'Mind the Gap' Study", Financial Analysts Journal, 12 May 2026, which is the same paper the second statement above cites. Morningstar sells products in the market it measures: its 2025 annual report states that it licenses its own indices "to numerous institutions to use as the basis for ETFs, mutual funds, derivatives and separately managed accounts" and that it had about US$378.0 billion of assets under management and advisement at 31 December 2025.

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