Passive beats active investing. It's a mantra repeated so often it seems to be a truism.
But is it?
Yes, sometimes passive outperforms active portfolio management. During 2014, only 10 to 20 percent of active domestic, large-cap managers bettered their benchmark indexes, according to data culled from a Morningstar database. Passive indexing bested active managers during much of the current bull market, which began in 2009.
Still, I believe in the cyclicality of the two styles of investing. There have been numerous periods when most large-cap, active money managers outperformed. One particular timeframe, 2005, just before the Global Financial Crisis, about 80 percent of active managers beat their benchmarks.
No one can predict with absolute accuracy which investing style is better for any future time frame. Two past trends, however, may be appropriate guides for some investors.
One trend is contrarian: When passive investing is at a peak, active investing is at a point of "maximum pessimism," which is also when the downward trend starts to reverse.
In other words, sell when others are ebullient and buy when others are fearful. It has been proven again and again over decades. Just ask Sir John Templeton or Warren Buffett.
The second trend: interest rate direction. History shows that when rates are rising, active management outperforms passive management.
When rates go up, lower correlations, or higher dispersion, between stocks and sectors occurs. This phenomenon places a premium on stock picking skills.