Rick Ferri and Alex Benke recently collaborated on an interesting white paper called A Case for Index Fund Portfolios, which I introduced in my previous post. They compared index portfolios to thousands of randomly generated active portfolios to estimate the probability of outperformance. Passive came out ahead in about 80% to 90% of the trials, which is compelling enough. But there were some surprises, too. Let’s look at a few of them.
Indexing gets better with age
Ferri and Benke’s paper was novel in that it looked at portfolios rather than individual funds. They found that combining index funds led to greater outperformance than you would expect from examining the funds in isolation. In other words, the portfolios were greater than the sum of their parts. The authors called these factors Passive Portfolio Multipliers, or PPMs
One of these PPMs highlights the importance of taking a long-term view. Ferri and Benke looked at the five-year periods ending in 2002, 2007 and 2012. The first of those periods includes the dot-com bubble, while the last includes the worst market crash since the Great Depression. Not surprisingly,