Passive vs active investing

I picked up this blog by Paul Kedrosky about a month ago. It's a nice mixture of tech and finance. It is more like a financial blog with a technology slanted point of view. Paul posts a lot of very interesting links to items that I would never have found.

One of the more recent posts is this research paper about active verses passive investing and the costs associated with them. Some of the comments missed the point of the article. It is not just about active and passive individual traders, but also the mutual funds both active and passive. From the sounds of the comments these are active traders who trade on a daily basis for their lively hood.

The point of the article is to point out why the small investor should not try to beat the market. The odds of the small individual trader, a trader who does not make a living by buying and selling stock, having enough information or resources to try and out perform the market is almost always doomed to under perform the market in the long term. The costs being spent to try and beat the market could actually cause the smaller investor to under perform the market.

So, instead of buying individual stocks, the small investor would be better off buying index funds, or ETF's. These have the lowest cost and give you near market returns.