Passive trackers

bostonerimus

dunstonh wrote: »

it is not consistent with a passive approach as it is selecting sectors whilst eliminating others. Those are management decisions.
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Passive investing is basically buy and hold. You could be passive owing anything. Many passive portfolios will overweight EM Value etc. Making those initial asset allocation decisions is perfectly compatible with an ongoing passive approach. If you then get into rebalancing you can argue that it's no longer passive, or you could also argue that you are applying feedback to keep the allocation passive. That's getting into semantics.......but the idea that over weighting sectors is incompatible with passive investing is incorrect.

AnotherJoe

dunstonh wrote: »

One that does not involve management decisions on where to invest and where not to invest.
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By that definition all investment is active, which is not a very useful definition.

I would define passive as following indexes. You may indeed make an active decision to follow particular indexes, in fact its essentially impossible not to, but to define that as active then means that nothing is passive.

Edit: Boston makes a good point, another valid definition I'd agree with is creating an allocation and either sticking with the outcome of that or rebalancing. In either case it's a mechanistic approach that involves no decisions.

To me once you start making decisions after the initial starting point, it's active. I see nothing useful in Dunstons definition since I can't see any circumstances where whatever you do would be regarded by him as passive.

Perhaps Dunston you could explain an approach you would agree is passive?

Linton

AnotherJoe wrote: »

By that definition all investment is active, which is not a very useful definition.

I would define passive as following indexes. You may indeed make an active decision to follow particular indexes, in fact its essentially impossible not to, but to define that as active then means that nothing is passive.

Edit: Boston makes a good point, another valid definition I'd agree with is creating an allocation and either sticking with the outcome of that or rebalancing. In either case it's a mechanistic approach that involves no decisions.

To me once you start making decisions after the initial starting point, it's active. I see nothing useful in Dunstons definition since I can't see any circumstances where whatever you do would be regarded by him as passive.

Perhaps Dunston you could explain an approach you would agree is passive?

I broadly follow predefined allocations. But it's not possible to do this effectively with passive funds. I choose active funds mainly on the basis of their allocations. Does that make me a passsive investor? What does an investor who does not believe in strong market capitalisation weighting do?

Conversely index funds move their allocations in terms of detailed geographies and market sector weightings over time as the market changes - look at what happend in the tech boom/bust. Should someone who believes in constant allocations attempt to counter this? Then you have Vanguards UK Equity Income Index Fund which is based on a specially commisioned index that ensures that sectors are balanced and avoids undesirable companies such as those that have high yields because their share price is falling. All this seems rather active to me - can a fund's index be those shares the manager happens to like?

Some passive enthusiasts regard all active funds with horror and claim that any other approach than following The Index is doomed to failure. It is this point of view, particularly if promoted with evangelical fervour, that I feel is counter productive.

A more balanced view which both Dunstonh and myself have advocated is that one should define one's strategy and then buy the most appropriate funds to implement it. Whether a fund follows an index or not is about the least important factor on which to base a decision.

AnotherJoe

Linton wrote: »

A more balanced view which both Dunstonh and myself have advocated is that one should define one's strategy and then buy the most appropriate funds to implement it. Whether a fund follows an index or not is about the least important factor on which to base a decision.

Possibly but the point at question is surely that following an index is passive. The idea being i could invest in US shares by picking specific shares or picking a manager who does teh same on my behalf via a fund, or I could invest in say the S&P 500.

Many proponents of passive would say in the long run, that S&P500 would beat one of those active managers, but that aside, to claim that by picking a fund that simply mirrors the S&P is "active" and therefore I'm not investing passively is sophistry and not helpful to the point under discussion.

I await a reply at some point from anyone but especially Dunston, on what passive investing is, if its not following an index. If it comes down to "because you got out of bed and decided to invest this morning thats active", im not sure he's contributing to the debate usefully. Actually i am sure, he isnt

Linton

AnotherJoe wrote: »

Possibly but the point at question is surely that following an index is passive. The idea being i could invest in US shares by picking specific shares or picking a manager who does teh same on my behalf via a fund, or I could invest in say the S&P 500.

If passive is defined as "following an index" how is departing from the index by overweighting particular areas passive? Surely it's up to the advocates of passive investing to define clearly what they are advocating. The rest of us can only discuss it on that basis, there is no point in us guessing what you mean and then have you saying it's wrong.

I agree that if your investment strategy is to follow the S&P 500 the best way to do it is to invest in an S&P 500 tracker. On the other hand if your objective/strategy requires you to for example have a different ratio of industries, large vs small or growth vs defensive an S&P 500 tracker may not be appropriate.

dunstonh

I await a reply at some point from anyone but especially Dunston, on what passive investing is, if its not following an index. If it comes down to "because you got out of bed and decided to invest this morning thats active", im not sure he's contributing to the debate usefully. Actually i am sure, he isnt

If you are making decisions to not invest in a sector at all or to only select large cap etc then these are significant management decisions. The person doing this is trying to be a fund manager.

You may want to be a low cost investor but you are not being passive if you are making significant management decisions.

Inevitably, as I have already mentioned, some level of management decision is required on all portfolios. Things like fund weightings are inevitable and whilst that is an active decision, it is something that every investor that uses single sector funds has to make. It is unavoidable.

Many proponents of passive would say in the long run, that S&P500 would beat one of those active managers, but that aside, to claim that by picking a fund that simply mirrors the S&P is "active" and therefore I'm not investing passively is sophistry and not helpful to the point under discussion.

Not sure anyone is actually saying that. However, if you were to say that I am not going to invest anything in US equity as I feel it is over priced and dont like Japan as its too volatile and only select small cap for the UK equity and so on then you are ceasing to be passive. If you use tracker funds for those then you remain a low cost investor but you cannot refer to yourself as passive.

You just have to look back at the many posts from the pro-tracker brigade as how they really dislike managed funds. So, why is that a fund manager being active is bad to devout passive investors but the investor being active ok?

Voyager2002

Linton wrote: »

Some passive enthusiasts regard all active funds with horror and claim that any other approach than following The Index is doomed to failure. It is this point of view, particularly if promoted with evangelical fervour, that I feel is counter productive.

Surely their argument is that active management costs you money in fees, and is unlikely to deliver an advantage over index-tracking that is sufficient to cover the cost to you of those fees.

Linton

Voyager2002 wrote: »

Surely their argument is that active management costs you money in fees, and is unlikely to deliver an advantage over index-tracking that is sufficient to cover the cost to you of those fees.

The academic data is pretty marginal, one paper I read said that active funds may have a slight advantage that is only sufficient to pay the higher fees. But the main problem is that a comparison only makes sense if the funds are invested in the same things. Buying a less appropriate set of investments could cost your more than any difference in fees.

bostonerimus

Linton wrote: »

If passive is defined as "following an index" how is departing from the index by overweighting particular areas passive? Surely it's up to the advocates of passive investing to define clearly what they are advocating. The rest of us can only discuss it on that basis, there is no point in us guessing what you mean and then have you saying it's wrong.

Maybe a better definition is avoiding market timing or as I offered "buy and hold". The quotation marks around "following an index" are well taken as there are lots of indexes. In the end I think people that advocate a passive approach are really advocating for the efficiency of markets and would be seen as promoting the work of French and Fama and so could well overweight small cap etc in their portfolios and the principles of keeping costs low and things simple as advocated by John Bogle. The larger point might also be that "passive" is not be the best description for this approach as it involves making choices and constant rebalancing within index funds and often personal rebalancing of a portfolio. For all those interested I would point you to the Bogleheads wiki.

https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy

Parking_Trouble

I am sure I am not alone in being bamboozled by a lot of investment discussion.

Passive - accepting or allowing what happens or what others do, without active response or resistance

Passive is surely just giving the money for someone else to invest on your behalf based on your stated risk appetite. Then sit back and reap the rewards.

Anything else is surely active?