Passive Investing: The Emperor Exposed?

Notice of Retraction

In October 2005, the Journal of Financial Planning published “Passive Investing: The Emperor Exposed?” by Christopher Carosa. The article questioned the accuracy of the generally accepted idea that actively managed portfolios underperform the market, proposing that studies showing the superiority of passive investing had been skewed by a “snapshot-in-time anomaly commonly found in measuring investment performance.” Carosa suggested a second flaw in traditional research: “The equal-weighted anomaly produces results that, while statistically accurate, fail to accurately reflect the results experienced by actual investors.” Carosa’s data analysis concluded that “active investors in U.S. equity funds performed better than the S&P 500 two-thirds of the time and by an average of 2 percent annually.”

A formal challenge of the article was made, which was addressed by a Journal-appointed Appeals Committee, whose report was published in the June 2006 issue of the Journal. The Appeals Committee did not find enough evidence in their review to recommend retracting the article.

The challenge to the article was later continued and revisited. Although the original proprietary data set provided to the author from an outside source could not be re-created, a new data set was supplied. Further inquiries indicated, and subsequently validated, that Carosa’s research and conclusions were based on data that did not match the data presented in the paper.

We requested follow-up research from the author to defend the article or offer new conclusions; none was provided. That, combined with further inquiries made by Journal and Financial Planning Association staff, the findings of which did not refute the challenging arguments, presented more questions than answers. Thus, in light of possible severe flaws in the article, we have decided to retract it. The article will remain in the Journal of Financial Planning’s archives as a link to the notice of its retraction.