As the active versus passive debate continues, relative performance is only a small part of the discussion according to a recent CFA Institute article that outlines three questions that both professional and retail investors should consider within this context:

• Is outperformance of a market index possible? The article says this depends on the “number of securities available in a given market, the dispersion between the best- and worst- performing among them, and the proportion of retail versus professional investors.” In the U.S., it says, active investors have “plenty of opportunities to add value,” but adds that “all markets are not equal.”
• How many active funds have outperformed their indices and for how long? The article notes that while both active and passive investors cite performance statistics to support their investing style, fund underperformance “doesn’t mean picking funds is an impossible or meritless endeavor. It just means it’s hard.”
• What are my investing abilities? This is the “most relevant question for any investor,” the article argues, adding, “Few of us can pick outperforming stocks and funds in advance. And for those that succeed, reversion to the mean eventually brings them back down to earth.” That said, it notes that investors can become overconfident in fund-picking abilities based on past performance data, noting that it’s important to consider qualitative factors such as fund management, philosophy and process.