As opposed to this passive style of investing, actively managed investments are those investments in which the trading manager is buying and selling stocks, bonds, futures, options, derivatives, or any combination thereof, with the expressed intent of generating net profits for the investor. Almost all investments other than index mutual funds are actively managed investments. Indexed investments have two key advantages over actively managed investments. The first advantage of index investing is that the frictional costs are extremely low.
Frictional costs are the total costs of trading, whether that trading method is passive or active.
Frictional costs include commissions, loads, bid-offer slippage, and other fees paid by the investor. Secondly, the track record of investing in U.S. stocks is very long and therefore highly reliable over the long term. Over the past ninety years the U.S. stock market has returned a yearly average of approximately 11.5 percent to the investor, including dividends. When an investor places money into actively managed investments, he or she is making the implicit assumption, whether conscious or not, that the markets are not a random walk. If the markets were purely a random walk, there would be no benefit derived from having someone attempt to actively manage an investment, because all attempts at gaining such an advantage would be futile, and frictional costs would only tip the scales further against such an effort.