In simpler times this question was phrased: Can you beat the market or not? In the early days the "market" was the S&P 500, and there was no vehicle available to match it.  Now, when someone walks into my office and asks how the market is doing, I ask "which market"?  There are hundreds of markets all over the world, and I want my clients to know that  because they should be invested in most of them. 

Rex Sinquefield co-founder of DFA, created arguably the first index fund back in 1973 at American National Bank. It tracked the S&P 500, and became "the shot heard around the world." It was this fund that American Telephone, today known as AT&T, invested $50 million into this fund and began the indexing revolution.

It was in 1981 the question changed from "Can you beat the market or not," to should I opt for active or passive management?"  Sinquefield and David Booth founded Dimensional Fund Advisors, applied the first passive approach to investing outside US Large Cap stocks.  It was here that the three factor model was applied to investing and paved the way for investors to achieve market rates of return. 

So, active or passive? Passive investing is best described as achieving market rates of return for the asset class into which you are investing.  If an investor is trying to achieve market rate of return for US Large cap stocks, he or she will be happy with performing on par with all of the US Large cap market.  If he or she is trying to achieve the market rate of return for international small cap value stocks , then he or she will be happy with achieving his or her aggregate return - no better, no worse. Simply put, passive investing dictates that an investor will not gain better returns than the market because the market foes not misvalue securities.

Active management is the opposite. An active manager believes there are people who make judgments on securities pricing that are better than the market price.  They know something that everyone else does not. For example, if ABC stock is trading at $10, you know that it is worth $15, so you buy the stock.  There are a few scenarios that could happen.  It is possible, but doubtful, that you were correct and the market correct

Passive asset management combines all of these different asset classes to achieve the highest possible return for the lowest level of risk.  This means that if you are comparing our portfolios to the S&P 500 you are going to find that our portfolios often beat the S&P 500 on a risk and return basis.  itself and the stock rises to $15. This scenario means every analyst, mutual fund manager and investor was wrong. Another scenerio is that you know something about ABC stock that no one else does. This means the stocks price will never change despite factual information that you know the stock is under-valued.  the last possibility is that you are wrong and the market has valued the stock correctly, and you now are locked in as a long-term investor.

Modern Portfolio Management combines all the different asset classes to achieve the highest possible return for the lowest level of risk.  If you compare our portfolios to the S&P 500, you are going to find our portfolios often beat the S&P 500 on a risk and return basis.

The results come from the mathematical approach of building portfolios. By combining all asset classes, we are able to combine highly risky assets with lower-risk assets, to achieve a portfolio with a significant opportunity to outperform the S&P 500 with a fraction of the risk.