Personal Finance Active vs Passive Investing in 2024

In 2024, navigating personal finance has become more challenging and complex but also filled with opportunities. Whether you're saving for retirement, investing in the stock market, or just trying to understand how macroeconomic trends impact your budget, staying informed is essential. In this article, we dive into some of the high-level financial trends of 2024, based on the latest SPIVA mid-year report, to help you make smarter financial decisions. Let's explore the key insights you should know, and what actions you can take to maximize your financial well-being this year.

1. Active vs. Passive Investing: Where Do You Stand?

The SPIVA report highlights the struggle of active managers in 2024, a trend consistent over many years. In the first half of 2024, 57% of large-cap active equity managers underperformed the S&P 500 index. For mid-cap funds, the performance was even worse, with 71% of mid-cap funds underperforming their benchmark (S&P MidCap 400). Meanwhile, only 15% of small-cap active managers underperformed the S&P SmallCap 600, which shows some promise for active management in this space.

The challenges faced by active managers aren't new. Historically, large-cap funds have often struggled to outperform broad benchmarks like the S&P 500. This is largely due to the fact that large-cap stocks are well-covered by analysts, and much of the information is already priced into the market. As a result, the room for active managers to add value is limited. On the other hand, small-cap funds have more opportunity for alpha generation, as these stocks are less covered and can have more inefficiencies for managers to exploit.

Fund Category	Underperformance Rate (%)	Benchmark
Large-Cap Funds	57%	S&P 500
Mid-Cap Funds	71%	S&P MidCap 400
Small-Cap Funds	15%	S&P SmallCap 600

Takeaway: If you're investing in large or mid-cap stocks, consider passive funds like index ETFs, which consistently outperform active managers over the long term. Small-cap funds, on the other hand, may benefit from active management, as managers have more room to add value through stock selection in this niche segment. It is important to regularly assess the performance of any active funds in your portfolio and determine whether the added management fees are justified by their performance.

2. Growth vs. Value: Shifting Trends

In the first half of 2024, growth stocks significantly outperformed value stocks, with an 18% differential between the S&P 500 Growth and S&P 500 Value indices. Growth stocks, typically characterized by high revenue growth rates and innovative business models, benefited from a favorable macroeconomic environment, including low interest rates and positive market sentiment around technology and healthcare sectors. However, this trend reversed in Q3, as the S&P 500 Value outperformed the S&P 500 Growth by 5%. The market witnessed a broadening rally as smaller cap stocks also rebounded during this period.

Period	S&P 500 Growth (%)	S&P 500 Value (%)	Differential (%)
H1 2024	23.6	5.6	+18.0
Q3 2024	9.0	14.0	-5.0

The shifting performance between growth and value stocks highlights the need for flexibility in portfolio management. Investors who were overly concentrated in growth stocks during the first half of the year saw impressive gains, but those who diversified into value stocks during Q3 were able to mitigate risks when growth stock performance slowed down. The reversal in Q3 was partly driven by a renewed focus on fundamentals, as investors sought undervalued opportunities in sectors like financials and energy.

Takeaway: If you are invested in growth stocks, it might be time to rebalance. The rapid rise of growth stocks can lead to overconcentration. Diversifying towards value stocks can help stabilize returns, especially when market sentiment shifts, as we saw in the third quarter. A balanced approach that includes both growth and value equities allows for better risk-adjusted returns over the long run, especially during periods of economic uncertainty.

3. Fixed Income Opportunities: Look Beyond Government Bonds

The fixed income landscape also presented opportunities in 2024. General Investment-Grade funds and High Yield funds outperformed their benchmarks, with 80% of Investment-Grade funds and 61% of High Yield funds outperforming. In contrast, General Government bond funds faced a tougher environment, with 75% of these funds underperforming the benchmark.

With tightening credit spreads and a more risk-tolerant environment, investment-grade and high-yield bonds became more attractive to investors seeking higher returns than traditional government securities. High-yield bonds, often referred to as "junk bonds," tend to offer higher yields due to their increased risk of default. In the first half of 2024, these high-yield bonds benefited from economic optimism, leading to tighter spreads and higher performance compared to safer government bonds.

Fixed Income Category	Outperformance Rate (%)	Benchmark
General Investment-Grade	80%	iBoxx $ Liquid Investment Grade
High Yield Funds	61%	iBoxx $ Liquid High Yield
General Government Bonds	25% (underperformed)	iBoxx $ Domestic Sovereign

Takeaway: Fixed income investors should consider tilting away from government bonds towards corporate bonds or high-yield bonds, as they provided better returns. However, always keep in mind the increased risk associated with high-yield (or "junk") bonds. Investors with a lower risk tolerance or those nearing retirement may prefer to maintain a mix that includes some government bonds to mitigate risk while seeking higher yields from corporate issues. Diversification across different bond categories can help balance the risk and return profile of your fixed income portfolio.

4. The Concentration of Wealth: Mega-Cap Stocks Lead Again

2024 has continued to be a year of market concentration, with the S&P 500 Top 50 companies outperforming the broader S&P 500 index by 5% in the twelve months ending in September 2024. This outperformance of mega-cap stocks was a continuation of the trend seen in recent years, where the largest companies, often technology giants, outpace the rest of the market.

Mega-cap stocks, such as those in the technology and consumer discretionary sectors, have benefited from scale advantages, strong brand recognition, and consistent revenue growth. In a year where many smaller companies faced challenges related to inflation and rising input costs, these larger firms were better positioned to maintain profit margins and invest in growth initiatives. As a result, the gains in the S&P 500 were primarily driven by the performance of a relatively small number of these mega-cap companies.

Takeaway: For individual investors, it can be tempting to chase the returns of big tech or mega-cap companies, but concentration also means higher risk if the bubble bursts. Diversification remains key. Consider keeping a balanced portfolio that includes both large-cap leaders and smaller, potentially undervalued opportunities. Overreliance on a handful of large-cap stocks could lead to heightened portfolio risk, particularly if these companies experience regulatory pressures or other setbacks.

5. Style Bias and What It Means for You

The report shows that style bias had a strong impact on fund performance. For example, 88% of Mid-Cap Value funds and 94% of Small-Cap Value funds outperformed their benchmarks. This suggests that leaning towards value-style investing, especially in smaller market caps, offered a significant advantage in 2024.

Value investing focuses on buying undervalued companies with solid fundamentals and stable earnings. In 2024, this strategy provided a buffer against market volatility, particularly as investors began to reassess overvalued growth stocks. Small-cap and mid-cap value stocks were able to capitalize on improved sentiment in undervalued sectors such as energy, financials, and industrials. This trend also reflects broader investor interest in cyclical sectors that are more tied to economic growth and recovery.

Takeaway: Value investing has historically provided a cushion during periods of volatility. If you're currently weighted heavily in growth, consider adding more value-oriented funds or stocks, especially in the mid and small-cap spaces. Value stocks tend to do well when interest rates stabilize or decline, and during economic recoveries. Maintaining a diversified approach that includes value, growth, small-cap, and large-cap investments can provide better overall balance and reduce downside risk.

6. Managing Risk in a Shifting Environment

Market volatility in 2024 has been a rollercoaster. The interquartile range of fund performance (the spread between the top 25% and bottom 25% of funds) narrowed significantly in the large-cap category compared to 2023, indicating that overall volatility within actively managed large-cap funds declined. This suggests that despite some sharp movements in the market, the performance of large-cap funds became more clustered, reducing the variance in outcomes for investors.

However, managing risk is not just about looking at volatility metrics—it is also about understanding where the risks lie within your portfolio. In 2024, macroeconomic uncertainties such as inflation, changing interest rate policies, and geopolitical tensions contributed to market swings. Investors who diversified their investments across asset classes, such as equities, bonds, and alternative assets, were better equipped to handle these fluctuations.

Takeaway: In a year of shifting economic conditions and market reversals, consider managing risk by diversifying across asset classes and geographies. Narrowing fund performance indicates less divergence among active funds, meaning a well-diversified passive approach could capture overall market gains with lower costs. Additionally, reviewing your portfolio allocation periodically to ensure it aligns with your risk tolerance and time horizon is crucial in maintaining an appropriate risk-return balance.

7. Survivorship Bias: Be Aware

The SPIVA report also highlights survivorship bias, noting that funds that close or merge are often not counted in performance analysis, which can distort results. In 2024, survivorship rates were high across all categories, with over 98% of funds surviving the first half of the year. Survivorship bias can make average performance figures look better than they actually are, as only the better-performing funds tend to survive.

When funds underperform consistently, they are often liquidated or merged into other funds, and their poor performance is effectively removed from the data. This means that the funds that remain tend to be those with better performance records, making it appear that actively managed funds perform better overall than they might in reality.

Takeaway: When assessing fund performance, remember that many poorly performing funds simply disappear. Opt for funds with a long track record of performance and low fees, as they are more likely to survive and provide consistent returns. Paying attention to metrics such as historical fund performance over different economic cycles and the expense ratio can help you make more informed decisions about which funds to invest in.

Actionable Steps for Your 2024 Personal Finance

Based on the insights from the SPIVA mid-year report, here are some practical steps you can take:

Reconsider Active Management: For large and mid-cap investments, index funds or ETFs are likely better choices, given the consistent underperformance of active funds in these categories. Small-cap funds, however, may still warrant an active approach. Evaluate the specific areas of your portfolio where active management could add value, and be mindful of the fees involved.
Rebalance Growth vs. Value: If you are heavily invested in growth stocks, it may be time to rebalance towards value, especially in small- and mid-cap categories. This can reduce volatility and position your portfolio for future market shifts. Value stocks tend to offer more stability, especially during periods of economic slowdown or rising interest rates.
Diversify Fixed Income Holdings: Government bonds struggled in 2024, while corporate and high-yield bonds offered better returns. Diversify your bond portfolio to include a mix of corporate bonds, but be mindful of the increased risk. Maintaining a laddered bond strategy—investing in bonds with varying maturities—can help manage interest rate risk and provide a stable income stream.
Be Wary of Overconcentration: The outperformance of mega-cap stocks can lead to portfolio overconcentration. Ensure your portfolio remains diversified to mitigate the risks of a downturn among large tech stocks. Adding exposure to mid-cap, small-cap, and international equities can help reduce reliance on the largest U.S. companies.
Use Value Bias to Your Advantage: Value stocks, particularly in the mid- and small-cap space, showed resilience in 2024. Tilt your portfolio to include these value opportunities to help stabilize returns. Historically, value stocks have provided better returns during periods of economic recovery, making them a strategic addition to a balanced portfolio.
Focus on Survivors: Stick with funds that have a proven track record and have survived through multiple economic cycles. This can help you avoid the pitfalls of chasing high-risk, short-term opportunities. Look for funds with low expense ratios, as higher fees can erode returns over time.
Consider Geographic Diversification: Given the macroeconomic challenges in 2024, including geopolitical risks and varied growth prospects across different regions, incorporating international equities can enhance diversification. Emerging markets, in particular, may offer growth potential, albeit with higher risk. Diversifying across geographies can provide exposure to different economic drivers and reduce the impact of domestic downturns.

Conclusion

2024 has been a year of contrasts in personal finance: growth vs. value, large-cap vs. small-cap, and government bonds vs. corporate bonds. Understanding these trends can help you navigate the changing landscape with more confidence. Use these insights to rebalance your portfolio, reconsider your investments, and ensure you are positioned to take advantage of opportunities while managing risks effectively. Remember, staying diversified and adjusting to market trends can make a significant difference in achieving your long-term financial goals.

Ultimately, staying proactive, informed, and flexible in your financial planning is key. The lessons learned from 2024 can help you prepare for whatever the market has in store next, and by focusing on diversified, well-managed investments, you can be better positioned to weather economic shifts and capitalize on new opportunities. Stay engaged, review your portfolio regularly, and don't be afraid to make adjustments as conditions change. Your future financial success depends on the decisions you make today.