Passive Vs Active Investing - Video On Monevator

jabbahut40

Hi, As someone who is currently pursuing an active investing S&S ISA strategy I found this video quite alarming. Definitely some food for thought!

http://monevator.com/passive-investing-movie-video/

Is following a passive approach realist or defeatist?

Comments?

Jabba

richyg

I saw it and enjoyed it.

It didn't alarm me - It made sense and is something I have been interested in for a while. I cant argue with the logic.

It was good to see Bogle and Tim Hale the author of Smarter Investing - Buy it it makes a good read even if you want to pursue a different strategy.

I think we will see more of the low cost tracking funds with RDR and commision being more transparent - I like the Vanguard stuff as it seems to make sense. Blackrock are doing something similar in pensions called conscensus funds.

It reminds me of the getting financial advise (not IFA I hasten to add) in the early 1990's and being reminded that 2% fund management isn't really much of a percentage when all's said and done. Oh and the 6% bid offer spread is a one off cost that is just recouped over time.

It has taken a long time to realise that if a fund goes up 4% in a year 2% is 50% of the rise. Oh and I carry all the risk as well on the downside.

If I can get indexes that cost .5% , or .3% then those figures are 12.5% and 7.5%. It make a big difference in my opinion.

The average of a functioning market and cheap costs over a long period of time will do me.

Of course the active fund managers will scream from the rafters that I'm a defeatist, track the market down as well as up, cant jump into cash at a minutes notice like they can to avoid market falls etc etc. Fair enough i can take that on the chin.

Show me a fund that didnt tank in 2007/8 - funds in the main werent in cash then.

There is a quotation from Wall Street decades ago when someone visiting the harbour quayside and being shown around asked "where are the customers yachts ?"

The traders turned away with a knowing look in their eye.


Anyway heres to a sound future however you approach your investments :beer:

R.

Linton

In my view it depends what you want to invest in. If you decide that the FTSE100 or the major companies in the US are where you want to be then minimum charges are an important factor.

However, if for example you want to invest in funds producing income from dividends passive investing has not proved very successful so far and there are no useful indexes. Another area is smaller companies. Look at the data, managed funds in general do very much better than the indexes as many smaller companies are often rarely traded and so the indexes are not that meaningful. The necessity to investigate the details of particular companies gives a great advantage to managed funds.

You wanted a mainstream fund that didnt tank during the credit crunch - how about Ruffer Total Return? There are few passive funds that provide a balanced portfolio, whereas there are many managed funds that do so. Paying for this balancing could be very worthwhile if you dont want to do it yourself.

So my advice is to decide on where and what you want to invest in first and then identify the most appropriate fund. For broad investments in the major markets passive funds will guarantee no worse than mid sector performance. For another areas you need a more detailed investigation.

talexuser

I remember a whole load of discussion on this when Virgin launched their index tracker. I know it is an expensive one but after all the hype of the launch I don't remember anyone seriously recommending it, even with all the supposed advantages of not having expensive managers to fund etc.

It would be interesting to see the real difference over say 10 years of a low cost tracker like HSBC or Vanguard compared with say a mix of 3 or 4 of the top income funds, say actively changing income funds as they fell out of the top 10 of their sector, the un-recommended follow the leader type of investing. And maybe a third graph of maybe a contrarian (random) income mix to see if that worked any better.

Linton

talexuser wrote: »

I remember a whole load of discussion on this when Virgin launched their index tracker. I know it is an expensive one but after all the hype of the launch I don't remember anyone seriously recommending it, even with all the supposed advantages of not having expensive managers to fund etc.

It would be interesting to see the real difference over say 10 years of a low cost tracker like HSBC or Vanguard compared with say a mix of 3 or 4 of the top income funds, say actively changing income funds as they fell out of the top 10 of their sector, the un-recommended follow the leader type of investing. And maybe a third graph of maybe a contrarian (random) income mix to see if that worked any better.

Trouble is that a low cost tracker FTSE100 would only provide 3.5% or so income. Many investors in an income fund oddly enough want income.

grey_gym_sock

Linton wrote: »

Many investors in an income fund oddly enough want income.

yes, that is a bit odd, when they could achieve the same effect by selling a few units each year

though some platforms would now charge for selling a few units, which could be prohibitively expensive.

talexuser

Linton wrote: »

Trouble is that a low cost tracker FTSE100 would only provide 3.5% or so income. Many investors in an income fund oddly enough want income.

Yes, you've hit a good point there, in 20 years of investing I have never drawn income yet, going for total return compounded so far.

Are the 2 scenarios so different? I suppose if you figure you can whittle away capital as additional income in the last years just in time for you to kick the bucket?

grey_gym_sock

it's a popular idea that it's OK to spend the income but no more. but not true.

with equities, it may be sustainable to spend a bit more than that. i.e. you can spend:

dividend yield + average capital gain - inflation

it doesn't matter whether the return is in the form of a dividend or a capital gain.

(and with a savings account, you can't sustainably spend all the interest, allowing for inflation.)

Linton

grey_gym_sock wrote: »

it's a popular idea that it's OK to spend the income but no more. but not true.

with equities, it may be sustainable to spend a bit more than that. i.e. you can spend:

dividend yield + average capital gain - inflation

it doesn't matter whether the return is in the form of a dividend or a capital gain.

(and with a savings account, you can't sustainably spend all the interest, allowing for inflation.)

From a practical point of view it makes life much easier to have the money coming in at a fairly steady rate without any effort. If you take money from capital you have the repeated decision as to which investments to sell. Also, the type of investments that pay high (but not unrealistically high) dividends tend to be less volatile than those that rely purely on capital growth. So, an income investment portfolio is different to one whose purpose is capital growth - ie provides diversification.

In my case I have separate income and growth portfolios. The income one is largely dividend paying FTSE350 shares and the growth one much more volatile managed funds - EM, Far East, Tech, Small companies etc etc. Keeping the portfolios separate facilitates rational decision making on where to invest - each investment has a clear objective and can be discarded when it no longer meets that objective.

grey_gym_sock

individual shares require more of a decision about what to sell.

funds you could do more mechanically. you could even rebalance by selling suitable amounts of each fund held.

richyg

Linton,

"You wanted a mainstream fund that didnt tank during the credit crunch - how about Ruffer Total Return? There are few passive funds that provide a balanced portfolio, whereas there are many managed funds that do so. Paying for this balancing could be very worthwhile if you dont want to do it yourself."

I looked at the graph and its astonishing . Consistently outperormed the market.

Indeed I thought I would invest myself as it looks so good and consistent.


But on further investigation ...

Its a hedge fund .

And Mr Ruffer tongue in cheek is quoted as saying says it has returned percentages higher than the US Mr Mr Madoff. Alarm bells ?

"Well, when we had £6 billion, the top 30 clients accounted for a third of the business, or £2 billion. The next 300 clients accounted for the next £2 billion, and I wish there had been a further 3,000 who accounted for the last £2 billion, but it was actually about 3,600! So I think we’ve probably got about 4,000 private client units."


"There has been the odd 12 month period when we might be down 0.3% or 0.8%, but essentially we have never lost money, taking it on a one year perspective, and we’ve compounded at 11.5%. Well, that’s better than Madoff! "


It may be that fantastic but I'm sorry it doesnt get my retirement pot.

Best Regards

RichgG