Switching from active to passive funds?

JohnWinder

It’s worth stepping back for a minute to consider some of the fundamental issues in such a decision, and ‘doing quite well of late’ would be very low on the list.
If you believe the idea that you reduce your risk of individual stocks going belly up by being well diversified, then you go for a very broad fund be it active or passive. But the broader the active ones go, the more they resemble the passive ones.
Secondly, or if not secondly then ‘as well’, you’d like the fees to be low if it’s a big investment and it’s to run for many years. None of that is too contentious.
When you diversify globally you have currency exchange rate risk to worry about. Some people choose currency hedging to help, others weight their stocks to stocks valued in your own currency (home bias). That’s not the only reason for home bias, it’s a contentious issue, but you can read Vanguard’s thoughts on it and appraise them for yourself (see Vanguard’s 2019 research paper ‘Global equity investing’), and this analysis (https://www.bogleheads.org/blog/2020/03/02/50-years-of-investing-in-the-world-part-3/).
If those considerations haven’t led you to a solution, then I suppose you have to take sides with active vs passive. It seems a large proportion of active funds can’t beat a comparative index over a long period, so it’s obviously a very competitive space the active managers are working in with endless information about the market available widely at the drop of a hat.  Some people use ’t’ tests to demonstrate that any outperformance is likely luck not skill, since there are so many active managers that just by chance some must persistently outperform (https://www.ifa.com/articles/calculations_for_t_statistics/). I have no idea. The most favourable research I’ve seen suggests that you would have a slightly better than even chance of picking a future successful manager if you chose one who had a long-ish history of good performance. Whether that finding from one country is generalisable to another, who knows, or will even be reproducible in the original country.
If you chose a passive fund, it ought to track its index closely, and it ought to use a sensible index. There’s some fine print here that’s beyond my pay grade and perhaps is not worth agonising over, but you can hear why Vanguard changed from the MSCI index to the CRSP index because the index made more gradual changes to its composition so that Vanguard wasn’t obliged to make huge trades so as to keep close to the index (https://www.bogleheads.org/blog/2021/09/02/episode-037-gerry-oreilly-and-rich-powers-host-rick-ferri/)
If you choose active, then you hitch your wagon to one or a handful of people who are responsible for getting you better than market returns. To me, that means you have to watch your managers closely for style drift, being head-hunted to another fund (or setting up their own), death and whatever else can affect their performance. And then make a decision to react if something happens.
Lastly, don’t compare returns alone without ensuring both funds have the same risk level, or compare risk adjusted returns. Saying one had done better than another is meaningless, unless it’s shorthand for ‘done better on a risk adjusted basis’.

AsifM068

I'm currently reading about Sharpe ratios re risk adjusted returns...it's endless, the more I read / research, the more questions emerge...hey ho.....  

tebbins

Welcome to the rabbit hole.

AsifM068

Tell me about it Tebbins!

It's amazing how little I know about this investing business 🤭🤪

Thrugelmir

AsifM068 said:

Tell me about it Tebbins!

It's amazing how little I know about this investing business 🤭🤪

With limited time and resources. Better to focus on the investments themselves. As that's where the real rewards can be found. Than get bogged down in macro market commentary. 

AsifM068

I may be overthinking things and there is no rush retirement planning wise however I have learnt much since joining the forum and has broadened my thinking.

Thank you all.👍