At the start of the evening news the pretty face in the tight clothing (because, after all, it’s news and not entertainment – ha!) tells you it’s going to rain tomorrow. You’ll probably bring an umbrella.

Later in the program when the full forecast is provided you hear it’ll be nothing more than short-lived drizzle.

100% chance of rain? Absolutely. Material impact? Of course not. Sounds like lugging around an umbrella will be pointless.

It’s a silly example yet a powerful point. Making decisions based on partial information isn’t the smartest of moves.

What about investing? Don’t want to underperform the index? Then just buy the index. Don’t buy active management because although you might outperform you probably won’t.

That’s the message from every academic who believes in efficient markets. That’s the message from every penny pincher who looks at the cost of indexing vs. active management.

The “proof?” Last year 87% of domestic equity funds (whether large/mid/small cap) underperformed their respective benchmarks. Yup, 87%. So why buy active management?

The answer – the one that provides the spotty shower detail to the rain forecast – lies in the way an index is constructed.

The most popular index is the S&P 500. It’s cap-weighted. In plain language the larger the company the greater the impact.

Pepsico is a $140 billion company. Coca-Cola weighs in at $180 billion. If the stock of each increases an identical 10% their impact on the S&P 500 won’t be the same. Because Pepsico is smaller its impact on the S&P 500 will be less than Coca-Cola’s impact.

What if your active fund manager prefers Pepsico’s stock over Coca-Cola? All things equal the active fund will underperform its benchmark. What if the opposite is true? What if your active manager prefers Coca-Cola’s stock to Pepsico? All things equal the active fund will outperform its benchmark.

What’s the big deal? Not much when the companies are of somewhat similar size.

Now take this example to an extreme. Let’s pick on tech darling Apple – a company with a market value of $750 billion. That’s more than 5x as large as Pepsico. In the same hypothetical example where the stock of each company increases by an identical 10% the impact Apple will have on the S&P 500 will be more than 5x as great as that of Pepsico.

Starting to see the problem with benchmarking?

Apple’s stock has seen a meteoric rise. An active manager might decide it’s OK to give up possible additional upside because of a variety of concerns. Active managers look at lots of factors after all – liquidity, risk, concentration, economic environment, regulatory concerns, competitors, product/service substitutes and so on.

Should you make your umbrella-carrying decision based on a 100% chance of rain or would it help to know how heavy and for how long? Should you make your investment decisions based solely on performance or would it be helpful to consider many factors?

If you prefer the simplicity of a black and white world then indexing is for you. If, however, you appreciate that investing is the grayest of grays, a means to an end and but one piece of a larger financial puzzle known as your life then there just might be something about active management you’re not being told by the headlines about what percentage of funds underperformed their benchmarks.

Investing is a marathon – not a sprint. It’s OK to underperform at various points throughout the race. The idea is to be #1 at the 26.2 mile mark.