Passive vs Active Investing, and role of the PP

[sophie]

Several finance boards are now posting that all portfolios are "active" as a basic underlying premise..
.get overly dogmatic...

Sheer stupidity. What do you do with that information?
It's like telling an Inuit that cold doesn't exist; it's just the absence of heat where molecules are not in motion.
An excuse to tinker.
And stupid.

Trust dualstow to call a spade a spade!!

I think I defined active vs passive already. Passive = trading in order to maintain a pre-set asset allocation. Active = buying and selling in response to an individual's prediction of future market trends. Agreed?

The results of passive vs. active investing is not a subject for debate. It's been well established by now that a low-cost, passive approach overwhelmingly beats active trading over long time frames, not to mention that passive investing incurs less of a tax burden. The PP was designed to be exceptionally low cost and tax-efficient.

Question for the market-timers on this board: are you aware of the above and if so, why do you choose to market time?

[sophie]

"October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."

-- Mark Twain

[dualstow]

One can certainly argue that there's a spectrum involved, but conflating all approaches as "active" changes the meaning of the word for the benefit of only one party controlling the wordplay..

This is the essence of it. Maybe if I'd gotten a proper night's sleep. :-) (where's the afro smiley??)

[dualstow]

P.S.No offense meant to you, kbg, and apologies if any were taken. I'm just frustrated at the constant onslaught against the passive way.

At least we got a funny analogy from Tyler out of it. :afrosmiley:

[eufo]

I think I defined active vs passive already. Passive = trading in order to maintain a pre-set asset allocation. Active = buying and selling in response to an individual's prediction of future market trends. Agreed?

This pretty much nails it.

[Libertarian666]

Unfortunately, in order to be a passive investor you have to buy assets that scare you and sell assets that you love. That's hard to do! About the only way to make this easier is to detach a bit from your investments. Focus on your career, family, hobbies etc, and make investments something you look at briefly a few times a year. However, I guess that's a bit contrary to the idea of taking part in an investment forum. Maybe that's why the biggest category in this forum is "Other".

I'm a passive investor, in that I keep the same portfolio for many years unless my situation (or my evaluation of it) changes so that it is not optimal.

For example, I just sold a fair chunk of gold to pay off my mortgage because I'm trying to reduce my living expenses. I got get a guaranteed "return" from not having to pay interest any more.

I don't think that change makes my portfolio active, because I didn't do it to time the market or switch portfolios to get "alpha".

[JohnnyFactor]

Found this article today that says some states are beginning to declare passive investment accounts as abandoned and taking the money for themselves.

http://www.investmentnews.com/article/2 ... serAgent=1

[eufo]

Found this article today that says some states are beginning to declare passive investment accounts as abandoned and taking the money for themselves.

http://www.investmentnews.com/article/2 ... serAgent=1

I feel like I'm supposed to be surprised, but I'm not. Damn thieves!

[Libertarian666]

Found this article today that says some states are beginning to declare passive investment accounts as abandoned and taking the money for themselves.

http://www.investmentnews.com/article/2 ... serAgent=1

I feel like I'm supposed to be surprised, but I'm not. Damn thieves!

I don't think I'm in any danger of that, since I'm taking money out every month.

But I'm not surprised either.

[sophie]

Scary. I hope just logging into the account qualifies as "activity"! There are definitely accounts that I haven't touched for years except to log in to check messages and the account balance.

[dualstow]

Scary. I hope just logging into the account qualifies as "activity"! There are definitely accounts that I haven't touched for years except to log in to check messages and the account balance.

I hope so, too. This is ridiculous.

[barrett]

Continuing off topic...

It's also a good idea to visit one's safe deposit box annually and gently fondle the gold within so as to not be mistaken for a dead person.

[sophie]

Barrett, you just HAD to use the word "fondle" didn't you??

This is on-topic sort of...a risk of passive investing that none of us ever thought of! Maybe I should make a point of sending a message annually on accounts where I haven't made any trades for the past year. Like, "Hey dude, when are you going to give us the option of buying gold in a retirement account?". Or simply, "I'm alive and well. Just not an active investor. Please don't give my hard-earned money to the government."

[Smith1776]

Barrett, you just HAD to use the word "fondle" didn't you??

I happen to keep a silver ounce in my wallet purely for day-to-day fondling purposes. :D

[Kbg]

P.S.No offense meant to you, kbg, and apologies if any were taken. I'm just frustrated at the constant onslaught against the passive way.

At least we got a funny analogy from Tyler out of it. :afrosmiley:

No worries. And for the record I would classify myself as a semi-passive investor or more accurately a mechanical or algo investor. Here is what I actually believe:

1. You can only invest in consistently that which you have a strong belief in

2. Costs matter

3. Taxes matter

4. Consistency matters

While we've spent a bit of key stroke energy on this topic I'm not sure at the end of the day debating passive vs. active is all that helpful. My main point, which I'm not backing down from, is that how you invest and what in is an active decision. How to build an index is an active decision, how to manage an index is an active decision. The very fact you are in a PP vs. 60/40 (or whatever) was an active decision you made. How you transition your port from earning years to retirement years is an active decision...so be informed and educated about why you are doing whatever it is you are doing with your investments.

My journey...read Craig's book, Read Best Laid Plans...hmmm this is interesting. Study/backtest/study/backtest...wow, gold boosted the crap out of this portfolio's performance back in the 70s, that's interesting (but for me not compelling). Hmmm...always trails a stock oriented portfolio except for severe market events at which point it catches up to then start trailing again. Wonder if I could actually trade this thing? I think I would get frustrated during the long lagging periods. Study/backtest/study/backtest...holy crap why didn't I notice before what low volatility this portfolio has? Hmmm...what if we add a dash of leverage to make it more competitive with a bull market? Voila...the VP PP was born (and already discovered as it turns out)

After 3.5 years of investing in the above I'd say I'm doing well on 1, 3 and 4 of the above things. One day if my port gets big enough I can add in #2 using futures, but for now I'm stuck with 3x ETFs for implementation.

[dualstow]

Good post. Ironically, at Bogleheads there is at least one thread about what might happen if too many people are into passive indexing. I saw a thread like it ten years ago, but nowadays the passive investing thing is really catching on. Doesn't worry me any. I'm proud of millennials for giving it a try.

And, as as been pointed out in one of those threads, there will naturally be a breaking point at which some people can't resist (re)turning to active.

There was an interesting article about the main guy at S&P in the Wall Street Journal. Well, the main guy responsible for changes in the S&P 500 components. Of course there's a whole committee and a lot of thought goes into it. Same case for those at the helm of actively managed funds, but the big difference for me is that those at the S&P don't have to worry about quarterly reports or shareholders dropping out.

Yes, we have to select an index fund, but I feel like I'm only active in that I'm actively choosing passive.

[ochotona]

Good post. Ironically, at Bogleheads there is at least one thread about what might happen if too many people are into passive indexing. I saw a thread like it ten years ago, but nowadays the passive investing thing is really catching on. Doesn't worry me any. I'm proud of millennials for giving it a try.

And, as as been pointed out in one of those threads, there will naturally be a breaking point at which some people can't resist (re)turning to active.

It won't be a pretty, graceful return to active. It will be a panicked, disorderly, fire sale at -25% or -50% from the peak where they yank the IRA back from the brokerage and put it into an IRA at the bank, all in cash. They will pick the bottom pretty precisely.

[Libertarian666]

Good post. Ironically, at Bogleheads there is at least one thread about what might happen if too many people are into passive indexing. I saw a thread like it ten years ago, but nowadays the passive investing thing is really catching on. Doesn't worry me any. I'm proud of millennials for giving it a try.

And, as as been pointed out in one of those threads, there will naturally be a breaking point at which some people can't resist (re)turning to active.

It won't be a pretty, graceful return to active. It will be a panicked, disorderly, fire sale at -25% or -50% from the peak where they yank the IRA back from the brokerage and put it into an IRA at the bank, all in cash. They will pick the bottom pretty precisely.

And the peak can be identified fairly well by watching for Boglehead threads on how having only 100% in stocks is for wusses.

That worked in 2008, anyway.

[Kbg]

About the S&P 500...it's really hard to beat because it guarantees two things. It invests only in the most successful companies in a pool where the majority do not even survive. It is CAP weighted, CAP weighting is a momentum strategy, and momentum is the oldest known proven (as much as one can prove something financial) market anomaly. And as a nice side benefit, it can be invested in now for a pittance. Assuming the US economy remains one of the best in the world I think it will continue to be a very difficult index and asset class to beat.

Of the two qualities my take is the first is the most important. For example, RSP even with higher fees has beaten the SPY over a long period of time now. RSP/equal weighting is a mean reversion strategy and mean reversion is a pretty dang good strategy when it comes to stocks.

[sophie]

4. Consistency matters

Amen to that. Frequent portfolio switches are kind of the new active investing strategy with an element of fooling yourself into thinking you're passive investing because you're playing with index funds.

Deciding on a portfolio is certainly an active process - although I think that's a different meaning from "active investing". English can be slippery that way. The point though is that once you've picked a portfolio, stick with it.