Passive trackers

Audaxer

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.

I think whether you choose to invest in a few indexes, like bostonerimus does in the US, or select about 4 or 5 indexes as recommended in Tim Hale's book, Smarter Investing, or choose a multi-asset fund of indexes like VLS, I think most people would consider each of these strategies to be passive investing.

grey_gym_sock

Parking_Trouble wrote: »

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

yes, that's the general sense of passive, which has been adapted to describe an approach to investing.

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?

handing it over to a manager is passive in a sense. but the next question is: does the manager manage your money actively or passively? because if she manages it actively, then your portfolio is being actively managed.

perhaps you're feeling bamboozled again ... how can anybody manage something passively? isn't all management active?

a passive manager is one who deliberately aims to accept the returns which the market gives, rather than aiming to achieve higher returns than the market, or than adopting some other target (e.g. an absolute target, such as 7% total return per year).

so supposing the market is UK shares, a passive manager might run a fund which tracks the FTSE all-share index (which is 1 measure of what UK shares as a whole are returning), and could do that by using all the cash the fund is given to invest to buy the same percentage of the available shares in all the (about 500 or 600) companies included in the FTSE all-share index. so e.g. the fund might end up holding 0.123% of the available shares in HSBC, and 0.123% of the shares in BP, and 0.123% of the shares in british american tobacco, and the same percentage for every other share in this index.

an active manager for UK shares would only buy some of the shares of the all-shares index, not all of them. and wouldn't buy the same percentage of the available shares in each of the companies she did buy some of. this would be based on some criteria - which could be hard data, or a hunch - about which shares, held in which proportions, are more likely to meet the fund's stated aim (whatever that is: just beating the index, or an absolute return, or high income, or whatever).

an active fund will - or should - cost more to manage than a passive fund. very cheap passive funds have become available over the last few years. so the question is whether it's worth paying more for active.

bostonerimus

Parking_Trouble wrote: »

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?

You have indeed been bamboozled. Passive investing is usually more DIY than active investing as the funds used don't have managers making strategic decisions.

Passive investing seeks to minimizes buying and selling to keep costs down....but it doesn't eliminate them entirely. It often uses market index tracking funds to keep costs low and give diversity. It is a strategy that can be implemented with just a few indexes or with several to overweight certain sectors...it is not limited to large cap weighted indexes. Passive investing does not attempt to time the market or buy and sell on hunches, or prognostications, but a passive portfolio might be periodically rebalanced to keep it's asset allocation within certain preset boundaries.

coyrls

It's a bit sterile to discuss what constitutes an active or passive investor, as there is no agreed definition of an active of passive investor. There is very little dispute about what constitutes an active or passive investment. An investor can choose to build a portfolio from active or passive investments or a combination of both. There is a continuum of how "active" an investor may be in constructing and managing a portfolio of investments. The construction of a portfolio may follow market weightings, may contain "tilts" to certain sectors or may diverge significantly from market weightings. Management may be limited to periodic or trigger based rebalancing to the original weightings or may extend to changing weightings and introducing or removing sectors based on the investor's view of economic conditions. How active an investor is is logically independent of the choice of active or passive investments but in practice I think there is a bias towards passive investments by less active investors and towards active investments by more active investors, hence some of the confusion between active and passive investments and active and passive investors.

bostonerimus

coyrls wrote: »

It's a bit sterile to discuss what constitutes an active or passive investor, as there is no agreed definition of an active of passive investor. There is very little dispute about what constitutes an active or passive investment. An investor can choose to build a portfolio from active or passive investments or a combination of both. There is a continuum of how "active" an investor may be in constructing and managing a portfolio of investments. The construction of a portfolio may follow market weightings, may contain "tilts" to certain sectors or may diverge significantly from market weightings. Management may be limited to periodic or trigger based rebalancing to the original weightings or may extend to changing weightings and introducing or removing sectors based on the investor's view of economic conditions. How active an investor is is logically independent of the choice of active or passive investments but in practice I think there is a bias towards passive investments by less active investors and towards active investments by more active investors, hence some of the confusion between active and passive investments and active and passive investors.

Great point!

Let's leave it as index funds being passive and managed funds being active.

AnotherJoe

bostonerimus wrote: »

You have indeed been bamboozled. Passive investing is usually more DIY than active investing as the funds used don't have managers making strategic decisions.

Passive investing seeks to minimizes buying and selling to keep costs down....but it doesn't eliminate them entirely. It often uses market index tracking funds to keep costs low and give diversity. It is a strategy that can be implemented with just a few indexes or with several to overweight certain sectors...it is not limited to large cap weighted indexes. Passive investing does not attempt to time the market or buy and sell on hunches, or prognostications, but a passive portfolio might be periodically rebalanced to keep it's asset allocation within certain preset boundaries.

I think its this.

That whatever you decide to invest in, be it US stocks, UK, Europe, Emerging markets, Biotech or simply the entire global stock market, you do it by picking indexes to follow, rather than either selecting specific stocks, or picking funds whose managers attempt to do better than the index for that market or markets through their strategy / research / clever algorithms / etc.

You can of course and most here probably do, muddy the waters by selecting passive for some areas, lets say US stock market, but active for others, say EM if you think there are reasons for different approaches in different markets

Linton

AnotherJoe wrote: »

I think its this.

That whatever you decide to invest in, be it US stocks, UK, Europe, Emerging markets, Biotech or simply the entire global stock market, you do it by picking indexes to follow, rather than either selecting specific stocks, or picking funds whose managers attempt to do better than the index for that market or markets through their strategy / research / clever algorithms / etc.

You can of course and most here probably do, muddy the waters by selecting passive for some areas, lets say US stock market, but active for others, say EM if you think there are reasons for different approaches in different markets

Presumably if you choose not to invest in the global market you use your personal strategy /research/clever algorithms or just simple hunches to come up with a different allocation. Why do you believe that index picking will benefit you? Why not just invest in a single global all cap tracker?

The approach of using separate index funds for different markets could be fine, except (a) in a global world it is open to question as to how different the geographic markets are and (b) there are other subdivisions of the global market which may be as or more significant than geography. Most of these subdivisions are not represented by tracker funds. Almost as many are not represented by indexes. However they may be a factor in active funds either explicitly by being part of a non indexed sector or implicitly from the strategy of the fund manager.

Thrugelmir

apollo9 wrote: »

would like exposure to small caps as well in more developed economies.

What do you regard as a small cap. Passive trackers have a high cut-off point in terms of market capitalisation. As there simply isn't the liquidity in the smaller stocks to obtain the correct weightings. Nor the ability to react to the daily volatility. While the major indicies move under the sub 10% range on a daily basis. Smaller companies are far more volatile. 10% movements are far from unusual.

Thrugelmir

capital0ne wrote: »

Bonds provide a big upside when combined with equities, they actually minimise risk in the correct proportion. Read The Intelligent Asset Allocator by Bernstein for more info.

This is subject rarely mentioned by the experts on MSE, probably because they seem more interested in guessing what to pick and why.

Discussed at length. All very well reading books of yesteryear. One also needs to understand the markets as they stand today. Also worth gleaning views from a variety of sources. As no one is always right nor always wrong. There's a time and place for everything. Wearing concrete filled boots is never a good idea.

bostonerimus

Linton wrote: »

Presumably if you choose not to invest in the global market you use your personal strategy /research/clever algorithms or just simple hunches to come up with a different allocation. Why do you believe that index picking will benefit you? Why not just invest in a single global all cap tracker?

Good question. You would have a small cap, value, EM index if you agree with the research that claims to show better risk/return performance if you overweight those. You could just buy the DFA funds....I think they are trading in the UK now http://eu.dimensional.com/en/

...that implement that strategy or do it yourself.

The approach of using separate index funds for different markets could be fine, except (a) in a global world it is open to question as to how different the geographic markets are and (b) there are other subdivisions of the global market which may be as or more significant than geography. Most of these subdivisions are not represented by tracker funds. Almost as many are not represented by indexes. However they may be a factor in active funds either explicitly by being part of a non indexed sector or implicitly from the strategy of the fund manager.

The range of index funds available in the UK might not be as varied as available in the US, but you can certainly find global small cap, and EM trackers easily. I'm not sure how much finer you need to go, or if you need to at all or even if at 2 billion pounds average market cap the Vanguard Global Small cap index is all that small......micro cap anyone?