Active Management is Not Necessarily Heresy

There are doubtlessly several scenarios in which investors are inclined or driven to invest in actively managed mutual funds. First, there is the investor whose 401(k) plan only offers actively managed funds, or index funds that are not cost efficient and/or do not track effectively.Second, there is the investor who holds a well-diversified core portfolio of index funds and would like to have “some fun, but with no more than 10 percent of the portfolio.” After all, index funds are boring.Third, there is the investor who suffers from the behavioral condition of “overconfidence.” This investor “knows” he can identify superstar fund managers who will outperform the market. After all, who wants to earn an average return?And, fourth, there is the investor who follows his broker's advice and holds actively managed funds, and does not want to change the relationship. After all, what do professors know about the real world of investing?These scenarios are in addition to any performance advantages of concentrated versus diversified fund portfolios