Passive vs Active Investing, and role of the PP

General Discussion on the Permanent Portfolio Strategy

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Passive vs Active Investing, and role of the PP

Post by sophie » Mon May 08, 2017 7:59 am

The forum has taken a decided turn of late into discussions of active investing, i.e. the attempt to time buying and selling assets in order to profit from predicted short term market swings. This isn't a problem in itself, but there are a few issues I would like to highlight.

The posts are in the wrong section of the forum, and possibly in the wrong forum altogether. There is a Variable Portfolio section, and that's where these discussions belong. The concept of the Variable Portfolio allows people with the urge to tinker a framework in which to do so without endangering their core holdings. The problem is that the posts of late are advocating this for those core holdings. In my view - and I'm surely not alone in this - this is exceedingly risky behavior, and it's contrary to the investment framework of this forum and its parent, the Bogleheads forum. I know some (two forum members in particular) will protest that they've done well, but that's irrelevant. You've done well because you've been lucky, and that luck will run out one day. Or, you simply remember the lucky shots but have forgotten the bets that you lost.

Questioning the PP's fundamentals are an important role of this forum, like - can it work outside the U.S., and do its basic assumptions still hold. But, questioning the PP precisely because it's a passive strategy is not legit. And may I point out that advocating constant switching of portfolios is another form of the same thing, except that instead of using a single stock or fund, you're using a collection of assets in fixed proportion.

Hopefully it's only my imagination that some people are being sucked into the siren song of active investing without being prepared for the consequences, and everyone is really just having fun jerking the chains of the two posters in question, and I'm taking this way too seriously. In the meantime...could I request that the moderators move discussions of active investing to the VP section?
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Re: Passive vs Active Investing, and role of the PP

Post by Jack Jones » Mon May 08, 2017 8:48 am

As I'm sure you're aware, there is a term for the behavior of the member(s?) in question (from wikipedia):
In Internet slang, a troll is a person who sows discord on the Internet by starting arguments or upsetting people, by posting inflammatory,[1] extraneous, or off-topic messages in an online community (such as a newsgroup, forum, chat room, or blog) with the intent of provoking readers into an emotional response[2] or of otherwise disrupting normal, on-topic discussion,[3] often for the troll's amusement.
If someone fits this definition for you, put them on your ignore list and don't respond to their posts. When they find that their posts aren't eliciting the kind of reaction they're hoping for, they'll hopefully go someplace else.
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Re: Passive vs Active Investing, and role of the PP

Post by Tyler » Mon May 08, 2017 10:55 am

Thanks, Sophie.

Discussing VP ideas in the appropriate sub-forum is fine, but it's important to remember that Gyroscopic Investing is an major landing spot for people researching the Permanent Portfolio. I appreciate you helping to keep discussions supportive and on-topic.
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Re: Passive vs Active Investing, and role of the PP

Post by Libertarian666 » Mon May 08, 2017 5:46 pm

sophie wrote: The posts are in the wrong section of the forum, and possibly in the wrong forum altogether. There is a Variable Portfolio section, and that's where these discussions belong. The concept of the Variable Portfolio allows people with the urge to tinker a framework in which to do so without endangering their core holdings. The problem is that the posts of late are advocating this for those core holdings. In my view - and I'm surely not alone in this - this is exceedingly risky behavior, and it's contrary to the investment framework of this forum and its parent, the Bogleheads forum.
I agree with everything else you posted, but in what sense is the Bogleheads forum the parent of this forum? I don't understand that reference.
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Re: Passive vs Active Investing, and role of the PP

Post by l82start » Mon May 08, 2017 7:09 pm

this forum was started out of/or just following the conversation in the giant PP thread at boggle heads. based on both the interest in it, and subsequent threads there, and the need for a more open forum where the topic of gold was not dismissed out of hand and the economics/politics of downturns could be discussed without being offensive or contrarian to the "stocks and bonds always win, just stay the course" mantra of the boggle head portfolio followers..
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Re: Passive vs Active Investing, and role of the PP

Post by Libertarian666 » Mon May 08, 2017 8:47 pm

l82start wrote:this forum was started out of/or just following the conversation in the giant PP thread at boggle heads. based on both the interest in it, and subsequent threads there, and the need for a more open forum where the topic of gold was not dismissed out of hand and the economics/politics of downturns could be discussed without being offensive or contrarian to the "stocks and bonds always win, just stay the course" mantra of the boggle head portfolio followers..
I didn't know that. Thanks for the clarification.

Of course I have known about the HBPP for decades before this forum was started...
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Re: Passive vs Active Investing, and role of the PP

Post by sophie » Mon May 08, 2017 9:52 pm

Tenn: thank you, that's a good solution.

Libertarian666: I put in the Bogleheads reference partly because as i2start said, this forum started to continue the discussion in the epic permanent portfolio thread on the Bogleheads forum. Also, passive investing is integral to the Boglehead group, and Jack Bogle (see their wiki page) makes a far better case for that passive investing beats active over time than I ever could.

Carry on guys!
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Re: Passive vs Active Investing, and role of the PP

Post by mathjak107 » Tue May 09, 2017 3:47 am

putting fun trading a side there is a big difference between a portfolio being dynamic and a fund trying to beat an index .

a portfolio that tends to shift with the big picture can do better than buy and die and in fact does many times . . altering allocations of what you own is very different than passive investing in an index and being passive . . index funds can make up the portfolio but that portfolio can change over time .

have you seen wellesly's long term bond allocation go from about 40% to 20% over the last year ? look at most balanced funds and you see they are actually dynamic in allocations . fidelity balanced was about 50% long term bonds and now they are 26% .

that is a portfolio being dynamic . . the newsletter i use that has beaten the s&p 500 by over 400k since i started is dynamic .

passive investing beating active investing does not refer to portfolio construction . it is only a comparison to a fund or manager with a stated objective that has to be met and stayed within .

allocations shifting within a portfolio as the bigger picture changes is not what bogle is referring to when he says active vs passive .

managers are bound by fund objectives , what they can own by sec rules and most likely beating their indexand other funds . unlike us who can invest anywhere , hedge our bets at times with defensive assets or concentrate at times in not beating an index but not losing money .

we have a world of assets to choose from at different times that fund managers do not . so you are comparing apples to oranges when you talk passive investing in funds vs portfolio's that don't change a thing , ever .
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Re: Passive vs Active Investing, and role of the PP

Post by Libertarian666 » Tue May 09, 2017 4:16 am

mathjak107 wrote:putting fun trading a side there is a big difference between a portfolio being dynamic and a fund trying to beat an index .

a portfolio that tends to shift with the big picture can do better than buy and die and in fact does many times . . altering allocations of what you own is very different than passive investing in an index and being passive . . index funds can make up the portfolio but that portfolio can change over time .

have you seen wellesly's long term bond allocation go from about 40% to 20% over the last year ? look at most balanced funds and you see they are actually dynamic in allocations . fidelity balanced was about 50% long term bonds and now they are 26% .

that is a portfolio being dynamic . . the newsletter i use that has beaten the s&p 500 by over 400k since i started is dynamic .

passive investing beating active investing does not refer to portfolio construction . it is only a comparison to a fund or manager with a stated objective that has to be met and stayed within .

allocations shifting within a portfolio as the bigger picture changes is not what bogle is referring to when he says active vs passive .
By mathematical necessity, the average active trader will do worse than the average passive investor by the amount of the extra trading costs.

Of course everyone thinks that he (or she) can beat the averages, but again by mathematical necessity, at least half of everyone must be wrong.
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Re: Passive vs Active Investing, and role of the PP

Post by mathjak107 » Tue May 09, 2017 4:30 am

trader , yes , i agree 100% , most traders will under perform but we are not talking traders in this example . i would never trade with my serious dough but i do maintain dynamic portfolio's and always did .

when i talk about a portfolio being dynamic , what we are talking about as an example would be ; a high yield bond fund in your portfolio was a fabulous place to be last year , they beat the s&p 500 with about 1/2 the risk . i got almost a 17% return from fidelity high yield last year and HYG with a beta of .56 on the fidelity fund .

that is an amazing risk vs reward . it was low hanging fruit as the market panicked and priced things like 1/2 of all the oil oil companies who had high yield bonds were going to default . it was insane because even if 1/3 of every energy company defaulted the math said you would still at least get the high interest rate but perhaps no appreciation .

today that value is gone and the spread between high yield and quality shrank to a point where it is not worth the risk . while last year my portfolio had 20% in a high yield fund today it is zero .

that is keeping a portfolio dynamic and like steering a big ship you nudge it slightly to keep it on course better .

at one time the very conservative income model used a balanced fund as a small part . today we use a small allocation to a dividend income fund and the bond portion is better allocated to an assortment of different kinds of bond funds .

that way the bond side can be fine tuned as rates and conditions change . if inflation picks up there are much better choices in bond fund types vs if rates rise and keep inflation in check . .

we stayed clear of foreign stocks for years . now we have 10% committed to foreign in the growth model

so these are the types of things a dynamic portfolio does . it does not chase returns by trading in and out of things like socks . it just nudges things to better hold the course . even if wrong you won't get hurt , you just may not capture the attempted benefit .

you don't have to be right all the time . in fact you can be wrong most of the time as long as when you are right it is by a greater percentage in gains .

that is a very important point even when comparing funds . a fund manager cam miss beating his index more often than beating it . but if when he miss's it is by a point and when he beats it it is by quite a few points the fund can still do well even though it appears not on just a beat or no beat basis .

so the point is passive vs active investing does not mean never changing you portfolio holdings or allocations . the funds used may very well be etf's or index funds and can be passive . but that does not mean your portfolio can't change ..
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Re: Passive vs Active Investing, and role of the PP

Post by Libertarian666 » Tue May 09, 2017 5:14 am

mathjak107 wrote:trader , yes , i agree 100% , most traders will under perform but we are not talking traders in this example . i would never trade with my serious dough but i do maintain dynamic portfolio's and always did .

when i talk about a portfolio being dynamic , what we are talking about as an example would be ; a high yield bond fund in your portfolio was a fabulous place to be last year , they beat the s&p 500 with about 1/2 the risk . i got almost a 17% return from fidelity high yield last year and HYG with a beta of .56 on the fidelity fund .

that is an amazing risk vs reward . it was low hanging fruit as the market panicked and priced things like 1/2 of all the oil oil companies who had high yield bonds were going to default . it was insane because even if 1/3 of every energy company defaulted the math said you would still at least get the high interest rate but perhaps no appreciation .

today that value is gone and the spread between high yield and quality shrank to a point where it is not worth the risk . while last year my portfolio had 20% in a high yield fund today it is zero .

that is keeping a portfolio dynamic and like steering a big ship you nudge it slightly to keep it on course better .

at one time the very conservative income model used a balanced fund as a small part . today we use a small allocation to a dividend income fund and the bond portion is better allocated to an assortment of different kinds of bond funds .

that way the bond side can be fine tuned as rates and conditions change . if inflation picks up there are much better choices in bond fund types vs if rates rise and keep inflation in check . .

we stayed clear of foreign stocks for years . now we have 10% committed to foreign in the growth model

so these are the types of things a dynamic portfolio does . it does not chase returns by trading in and out of things like socks . it just nudges things to better hold the course . even if wrong you won't get hurt , you just may not capture the attempted benefit .

you don't have to be right all the time . in fact you can be wrong most of the time as long as when you are right it is by a greater percentage .

so the point is passive vs active investing does not mean never changing you portfolio holdings or allocations . the funds used may very well be etf's or index funds and can be passive . but that does not mean your portfolio can't change ..
The math is the same as with a trader. If active investing has higher investing costs than passive investing, then the average person who invests actively must do worse than the average person who invests passively, by the amount of the extra costs from the active investment.

Of course some people will outperform the averages. I did, by quite a bit, from 2000 until 2012, then mean reversion got to me. But I wasn't trying to outperform. I was trying to preserve my wealth.
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Re: Passive vs Active Investing, and role of the PP

Post by mathjak107 » Tue May 09, 2017 5:22 am

that is why the whole passive vs active fund investing is really meaningless to us individuals .

we all buy in at different times , some of us at better prices than others , we add money at different times , we sell at different prices . we rebalance at different times .

throw in some of us have better tax structure , and what a fund got from point A TO POINT B is almost meaningless . we will all get somethings right and somethings wrong so thinking the fees or a static chart of performance are the be all and end all is a mistake .

especially when talking in terms of portfolio's and their interaction and holdings .

what kind of account you keep your equities in and bonds in can matter a lot . even a 1% dividend distribution in a brokerage account can wipe out any tax advantage and eat in to gains as opposed to having them in an ira or 401k .

it always reminds me of the boglhead buying a car .

he pounds the dealer in to the lowest price , beats up the finance guy for the lowest terms and trades the car in wholesale selling for much less ..

in the mean time granny pays more for the car , pays a higher interest and sells the car privately , granny wins in the end .

there is so much interaction between all the pieces that singling out any parameters alone don't mean much in the real world and your result .

in fact just the balance you have at any point makes a huge difference .

1987 to 2003 saw 17 years of the greatest bull market ever . 17 years of almost 14% cagr .

but all well and good ,except the years leading in sucked and left most of us with little invested .

all well and good the charts show you were part of the greatest bull in history but with little money invested and the fact we had no 401k's yet to speak of it did little good .

but today even a small move represents a huge dollar change . a mere 7% change represent 9 years of maxing out my 401k at catch up .

so you can see how individual circumstance play a far greater roll than just getting the lowest fees or beating an index .

in the end it is all about your whole situation and portfolio interaction .
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Re: Passive vs Active Investing, and role of the PP

Post by dualstow » Tue May 09, 2017 8:18 am

Great OP Sophie.

I was a mod on a non-investing-related forum once upon a time. I was a longtime member, and the mods there were pretty inconsistent. Some heavy handed, some too lax, in my opinion.

It wasn't long before I became one of the heavy handed among the new mods. While I thought I was acting in the forum's best interests, keeping things orderly, I ran up against complaints that every time a topic got going, I split it up. How hard is it to follow the new thread, I thought, if I insert a link.

Still, some members felt like they had a sword hanging over them.

Bogleheads is fairly strict. It's like the Singapore of forums. The good part is that topics don't drag on too long. The bad is that you can't really chit chat organically without private messages, and not everyone wants to use PMs.

I like that they don't tolerate political comments, b/c when I read the Washington Post or the Wall Street Journal, the comment section whether it's under a piece about fuel cells or a recipe for dandelion wine, inevitably turns to "thanks, Obama" or now, to Trump. And Bogleheads is free of that.

I don't like the same policy at other times because I can't insert a relevant comment about rising grocery prices in a thread about dividend growth. (not an argument for dividends).

I haven't learned my lesson b/c I am still very much in favor of moving-not-deleting, or as one airline CEO would say, re-accommodating. O0 Like Tenn said, it can be a daunting task. It can be like cleaning the Agaean stables.

I have been too abrasive with mathkak in the past where I should have made one anti-timing post (per thread) and dropped out. Even getting too friendly is a mistake, lest it be misconstrued as a tacit acceptance of market timing.

I have voiced my displeasure with all the non-pp or modified pp's that contain the word Permanent in the title. Some cannot even be called Lazy Portfolios. The most common one is the so-called pp without cash. Then there's leverage. Now there's timing.

I hate that newbies have to wade through that stuff,that non-pp strategy disguised as an acceptable variation in the main subforums. That's really where we should be as Draconian as the bogleheads forum. We should move it to the vp, and then I won't have to feel like such a dick for constantly calling it out.
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Re: Passive vs Active Investing, and role of the PP

Post by dualstow » Tue May 09, 2017 8:25 am

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Re: Passive vs Active Investing, and role of the PP

Post by mathjak107 » Tue May 09, 2017 8:31 am

i guess there are some things that can never be over stated
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Re: Passive vs Active Investing, and role of the PP

Post by Kbg » Thu May 18, 2017 9:56 pm

Several finance boards are now posting that all portfolios are "active" as a basic underlying premise...I agree to include the PP. The guy at pragcap started it I think and the idea is now proliferating for very good reasons. Really someone should start with what fits them and their circumstances vice get overly dogmatic about it. There are a host of wonderful tools for best guessing what a mix of assets might do under various circumstances. The main problem in reality is it normally takes years of mistakes to fully realize what does "fit" them.

Agree that just about anything that isn't pure PP should go over to the VP section...it's true to HB's concepts and detracts from this part of the board.
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Re: Passive vs Active Investing, and role of the PP

Post by sophie » Fri May 19, 2017 7:45 am

Sounds like market timing may be taking over those other finance boards you're reading. Give us more detail?

It's true that within the confines of the PP, it's very tempting and not at all difficult to incorporate some market timing into it - by which I mean attempting to predict market trends and acting accordingly. For example, I'm engaging in a bit of market timing myself: I'm assuming the Fed will make good on at least some of its planned interest rate increases, so instead of buying 1-3 year short term bonds for "medium" depth cash, I'm sticking with 3 or 6 month T bills. There's also the question of when to rebalance and how to add new investments - both events ripe for market timing. In the pure PP, you add all new investments to cash and rebalance when you hit a 15/35 band - but I suspect few of us do that. Harry Browne's original prescription also called for buying a set of 20 stocks, picking the most volatile ("Best Laid Plans"). He later changed this to buying an index fund, once those became available (Radio show).

The problem is that once you start down the market timing path and get to the point of flipping portfolios, things get really dicey. For example, several people have declared they've switched to the Golden Butterfly. Why? I think the main reason is recency bias - the stock bull market has gone on long enough that people no longer remember their visceral reaction to watching their investments drop 40% in value, or realizing that the 10 year return of the S&P 500 was approximately zero. The Golden Butterfly is a perfectly sound portfolio, but I suspect that the moment the stock market gets in trouble, many of its adopters will switch back to the PP. The effect will be the general fate of market timers: they will have bought stocks at market highs, and either not bought them or sold them at market low points.

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".
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Re: Passive vs Active Investing, and role of the PP

Post by ochotona » Fri May 19, 2017 8:28 am

I'm a big timing guy and I agree non-PP discussions belong in the VP thread. Beginners will get confused.
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Re: Passive vs Active Investing, and role of the PP

Post by Kbg » Fri May 19, 2017 9:07 am

Sophie,

Active as a term is somewhat in the eye of the beholder but the general notion is that choice of portfolio, its construction and its maintenance are all active decisions and there is no doubt the indexes are all active in that they are rule based in their construction and maintenance. Thus, "everything" is in fact active. Some bloggers will say the only non-active portfolio is one that basically aligns with the total global asset mix.

With regard to getting dicey...yup. All the challenges you mentioned are what I meant by making mistakes until you find something that fits you. Live example...the standard PP is not for me but I love the leveraged version of it I post on and have a good chunk of money in on the 20% returns thread in the VP section. Definitely HB inspired, but definitely not a PP.
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Re: Passive vs Active Investing, and role of the PP

Post by dualstow » Fri May 19, 2017 4:01 pm

Kbg wrote: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.
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Re: Passive vs Active Investing, and role of the PP

Post by Tyler » Fri May 19, 2017 4:13 pm

Agreed. That's a pretty lame argument. Lots of self-justification going on.

In other news, the dualstow newsfeed just punched me in the gut. I'll have to binge on Soundgarden tonight.
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Re: Passive vs Active Investing, and role of the PP

Post by dualstow » Fri May 19, 2017 4:15 pm

Sorry about that. We lost him too soon.
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Re: Passive vs Active Investing, and role of the PP

Post by Kbg » Fri May 19, 2017 4:26 pm

dualstow wrote:
Kbg wrote: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.
I 100% disagree. I think it is an extremely useful, though simple, insight. The net effect is no matter how you trade or invest you are making a bet of one kind or another (or multiple bets based on various assumptions and data sources) and there are zero ways you can avoid that simple fact.

I assume you know the history behind the 60/40 and the SPX's original construction which is (supposedly) the "standard" for a "passive" portfolio. If you don't, do some digging.

And here's what you do with that information...you look at your personal circumstances and tailor your investing assets to your particular situation, psychological inclinations and hope to heck the historical data you based your decision(s) on has any relevance/predictive power for what you decided to do.
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Re: Passive vs Active Investing, and role of the PP

Post by Tyler » Fri May 19, 2017 4:39 pm

Meh. IMHO, there's a big difference between making an educated decision on a passive portfolio that works for you and managing other active trading methodologies. 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.

Maybe I'll try this later. "Hey babe. Don't mind the mistress. We're all monogamous. After all, everyone here only has one spouse!"

That's not to say that active methods don't work well for some people or that a passive portfolio doesn't require a thoughtful decision, but everyone is better served if we own our differences and honestly discuss the tradeoffs rather than pretend every method is the same.
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Re: Passive vs Active Investing, and role of the PP

Post by Kbg » Fri May 19, 2017 5:02 pm

Tyler wrote:Meh. IMHO, there's a big difference between making an educated decision on a passive portfolio that works for you and other active trading methodologies. Conflating both approaches as "active" changes the meaning of the word.

Maybe I'll try this later. "Hey babe. Don't mind the mistress. We're all monogamous, after all. I'm only married to one person just like you!"

That's not to say that active methods don't work well for some people or that a passive portfolio doesn't require a thoughtful decision, but everyone is better served if we own our differences rather than pretend every method is the same.
This is definitional (yours) which as I mentioned up front is in the eye of the beholder. You are defining "active" as more frequent trading (which is fine). But I would suggest what is more important about the distinction you are making with regard to frequency is the following:

- increased trading costs
- in the US, more ST vs. LT gains and the accompanying tax effects
- greater likelihood of damaging expected performance via more opportunities to screw up individual trading decisions

There are likely other negatives (and positives) you could add to the list, but my main point is that knowing what you are doing, why you are doing it and what the pros/cons are is far more important then thumping one's chest that they are a "passive" or "active" investor.

If I could pull off Renaissance Technologies in-house fund I'd be a be a super happy camper grossly rich active investor wondering why the little people are so enamored with "passive low cost investing." ;-)
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