So this is the story of my preference for passive investing. Or why the bros scared me off active investing. In short, who wants to make some rich men even richer?
Investing has traditionally been an active pursuit. You can research individual companies and buy the stocks that you think will be profitable. Or buy into an actively managed fund where the fund manager picks the stocks for you. This can deliver great returns and outperform the market index, or go the other way. We can see the past performance of all stocks and price in the information that is known about the company industry in which it operates, but no one can accurately predict the future returns.
Passive Investing or Indexing
However, there is an alternative to active investing in indexing. This is where instead of buying individual shares or active managed funds, you can choose instead to follow an index, such as the FTSE100 or S&P500. As there is much less work involved here, the costs are often significantly lower. You will also get the return of the index you choose to follow – with no chance of outperforming or underperforming it.
Read more: Monevator Guide to UK Passive Investing
Active vs Passive Debate
I would describe the difference between active and passive investing as balancing risk and ultimate rewards. You could be lucky with active investing and beat the market every year. Are you feeling lucky? Lucky enough to cover the active manager fees? With passive investing there is no opportunity to outperform – you get what the market delivers, each and every year.
While Warren Buffet has shown his ability to pick stocks and get winners over a long horizon, not many other fund managers have. Take for instance the recent case of the previously in favour fund manager, Neil Woodford whose fund has had to be frozen due to liquidy problems caused by poor performances. Are you backing the Buffet or the Woodford?
Read more: Monevator debate: Active vs Passive Deepdive
The bros – active fund managers
Now we come to one of my sticking points. The people who are professional fund managers generally fall into a certain type. Overwhelmingly men, very self-confident and sure of themselves. Expert at manipulating people to get what they want. Have you seen Wolf of Wall Street?
As an example, when they want your money they are suited and booted and are photographed in front of charts and business settings. However, when things go wrong, as in Neil Woodford’s case, they instead play on the emotions and soften their image.
Who wants to give them money? I treat dealing with active investment management like dealing with a casino – the house always wins. They get a slice through good times and bad times. I grant you, during good times their slice is larger as they get more funds in to invest, but they aren’t exactly struggling in the bad times.
And yes, I am generalising as most, but not all, investment managers are men. And despite the few women outperforming men, they are not rewarded for this. I’m a put my money where my mouth is kinda gal, and I cannot support an industry with these gender biases.
- Men are 90% of investment managers, but not cause they are good at their jobs
- Women outperform men but are paid less
- When will we see gender equality in investing?
More bros – investing analysts
And if that is not enough to put you off active investing, there is another layer of bros – the investing analysts. These bros come up more if you are researching and buying individual stocks. These fundamental analysts are all about the numbers and ratios and go over the financial reports of these firms with a fine tooth comb. Less outwardly offensive than fund managers, these have more the Stackoverflow lack of compassion. The expectation is you are up on every bit of data, and nuance and niceties don’t come into it.
In addition, the technical Analysts – Investopedia definition – who analyse the past data to predict the future. In my opinion, analysing graphs and trends do not indicate future performance accurately. It could be lucky and correct. Or wrong and not. Much like the way the roulette could land on your number. Sure, it’s going to be right some of the time. So, are you feeling lucky?
There is a disclaimer that is always used around the investment industry, yet doesn’t seem to be taken seriously by analysts.
Past Performance does not indicate future success
Simply put, I believe in Indexing. I keep away from the bros, keep my charges low and stay on the passive investing bandwagon.
Over to you
- What are your thoughts?
- Where are you on the active vs passive spectrum?
- How did you come to follow your current investing approach?