Important Past Post - Read and Understand All

Well, that’s a little exaggerated, you do need to figure out what percentage of your portfolio should be in stocks, how much in bonds, or in money market funds.
But for picking stocks, this formula will guarantee you avoid costly investment mistakes.

A = Total Stock Market
B = Active investors (traders, stock pickers, money managers, hedge funds)
C = Passive Investors (index buyers)
Y = Rate of return for the market
X = what we want to know

If Y, the market rate of return, is 12%, then the rate earned by C, passive investors, must also be 12%.
Let’s say for now that 70% of the investors are active, and 30% are passive index investors. So out of 100, or any number you like, could be a million or a skillion, but 100 will serve for now, there are
70 active investors
30 passive investors
Y is 12%
Plug in the numbers: 12%(A) = X%(B) + !2%(C)
So, given these facts, what did B, active investors, earn?

Let me simplify life for you, no matter what numbers you use for the market return, or the percentages of active versus passive investors, the answer is the same. In this case 12%.
Yes, the % earned by active investors averages the same percentage as both the market and passive investors, and obviously, not all active investors earn the same thing. some earn more, some less. The problem is that year over year, there is no way to predict which active investor will finish ahead, or which one will fall behind. It only looks that way when you look at the single most misleading, portfolio damaging indicator in the world, past performance.
I will discuss the absolute uselessness of past performance data in another section.

Before you challenge me on any of this math as flawed, let me point out it wasn’t me who thought it up. The general topic is discussed in Commentary, and a link to the article can be found in Referenced Articles. It is also referenced below
The formula used here is adapted from The Successful Investor Today, by Larry E. Swedroe,
St. Martin’s Press 2003.
For most equity investors, I believe in passive, index investing. I refer you to The Arithmetic of Active Management by William Sharpe, Nobel Laureate and Professor Emeritus at Stanford University as to the specifics of why. You can find that article in the section of this site called "Referenced Articles."
Essentially, Sharpe demonstrates mathematically why it is impossible for active investors as a group to perform any better than indexes, before costs. After costs, active investors must do worse. Are there active investors who will "outperform" from time to time? Of course, but always at the expense of other active investors who underperformed. Passive investors, by definition, get the market's rate of return, no more, no less. By the way, the active investors who do beat the market in any given year are almost never the same ones who beat it the next year. The simple arithmetic is that some fund manager will beat the market, but it's not likely to be the one you choose, and if it is, it's not likely that he can repeat the following year.