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The bros scared me off active investing – Thanks

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?

Active Investing

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.

Read more:

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

In Summary

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?

 


Thank you for reading – please leave a comment below and join in the conversation. You can also connect on Twitter or contact me privately.

34 comments on “The bros scared me off active investing – Thanks

  1. For me, I make it very simple. I don’t invest in stocks & shares. That’s because 2/3 of my wealth is tied up in my pension (not a SIPP) and I figure that’s enough exposure for me. It also means I can forget all about of this stuff as well as enjoy the tax benefits of contributing to a pension. Sure the charges at 0.5% aren’t as low as people taking other routes – but the tax savings on my contributions more than cover them and I consider it worth it, not to give any mindspace to things I have almost no control over. It just seems to me that with S&S that greater information just gives a bigger feeling of illusionary (rather than actual) control. I guess I’m the ultimate passive investor.

    The problem then becomes what happens if there’s a massive crash in S&S/my pension such that I couldn’t live on it when I want to retire?

    To counter that I keep a few years worth of expenses in easy to access cash and a bit more in P2P to support projects I like the look of (eg new solar farms) and for the higher interest rates to stop the overall value of my cash eroding through inflation. My mortgage-free home provides another back stop as I’d rent parts of it out if I got desperate for cash and it should easily keep the wolves from the door. I’m less worried about wealth in absolute terms and more about what it can do ie pay my bills and have some fun.

    1. Hi Greencat – thanks for sharing your perspective – indeed I get what you are saying about control, and how much do we really have?

      And I do agree you are a perfect passive investor – and sounds like you are worried about the sequence of returns risk there with a potential crash as you retire.

  2. I’m so glad you posted about this – I feel I need all the information I can get about investing at the moment! I’m a complete and utter newbie to investing, so although everyone seems to know who Neil Woodford is, I only heard of him due to the scandal.
    I do admit to being cautious due to the rambunctious reputation of the men involved in investing – all the movies I watched as a kid seem to back up what we see in reality. So much so, that (outside of weddings and other formal events) if I see a guy in a suit, I automatically assume they’re trying to sell me something for their own benefit and make sure to stay well awaaaayy. Wolves indeed 😂

    1. Hi Black Penny – a warm welcome to you as a newbie to investing – don’t worry too much initially, it all starts to fall in place eventually. Has taken me a whole to get here!

  3. Don’t disagree with anything you’ve said but
    The times piece you linked made a good point ‘women need to work harder to get the same funds under management, They presume that if someone doesn’t look like them, they won’t do as well.”

    The vast majority of investors are men so is this not just the industry reflecting its customer base?

        1. In my gender neutral utopia yes!

          Based on the board composition Fathercare would be more accurate.

          Yet on the shoppers and junior staff mothercare seems apt.

  4. I’m definitely on the indexing wagon with you. Even before I knew it was a thing, I always sought out the funds with lowest fees.. why pay extra money just to hold a fund?
    My philosophy started with Target Date Funds because I didn’t know enough, then I switched to Betterment which always uses the same 12 funds in varying ratios based on the investor’s risk tolerance. But once I saw their allocation, and they started charging more fees, I moved it all to Vanguard and followed JL Collins’ Simple Path to Wealth (VTSAX for stocks, VBTLX for bonds). I have varied from that a little bit to include exposure to more small caps and international stocks, which help increase my return and lower my risk.

    1. Hi Josh – good to see you are also an indexer! Thanks for sharing your evolution – I think we all move, migrate and learn as we learn more and develop more of our own individual investing style.

  5. I think trackers can be useful for new investors unable to diversify across a number of managed funds or unwilling to risk picking the wrong funds (e.g. Neil Woodford 2016 to 2019). I prefer to hold a number of actively managed investment trusts and on a ten-year view these have mostly bettered the UK all share index and the available UK trackers.

  6. Hi Ms ZiYou,

    When I first started to invest, I bought some individual stocks (but nothing too insane: GE and Berkshire Hathaway) but as I read more on investing, bought only index funds tracking S&P 500 or the total US stock market. I sold GE last year due to its poor performance, and with nearing retirement, I’m buying more VBTLX. Once I start living off of my investments, the 1st thing I’ll sell is BH as I’m completely sold on index funds now, like you, and Warren Buffett won’t live forever.

    Last year I spent some time talking to financial advisors about my impending retirement, just to get additional opinions and make sure I feel comfortable with my plan. 2 out of the 3 I talked weren’t fiduciary so I knew their advice was risky, but I was still shocked at how bad it was. One of the 2 is with TIAA (I’m an academic) which I find especially unforgivable, since they care for assets of folks who teach and thus, by definition, don’t make much money. Luckily I’m good with numbers and reasonably smart, and I actually enjoy reading about investing, but I know many colleagues and friends who aren’t or don’t… Really disgusting. I wish the industry could be regulated like, say, medicine or law 😡

    1. Hi FF –

      Thanks for sharing your journey – you started with some solid choices there in GE and Berkshire. And I agree with your thoughts that Berkshire without Buffet is not the same proposition.

      And wow at the financial advisors giving such bad advice – I think the regulations are made meaningless as they are funded by companies you invest in. The playing field is not level, and I don’t think I’d ever really trust an advisor (but that might just be stubborn ol’ me).

  7. Passive investing in low-fee index funds all the way for me! Sometimes in my line of work, I encounter examples of the type of hard work, research, etc. that goes into how decisions are made to determine what actively managed funds invest in… And also stories of how said funds end up underperforming compared to the market. If all that work and expertise doesn’t always have good results, I know I also like the expertise and willingness to do work and research required to make good decisions about individual stocks and/or even select an actively managed fund I think is a good idea. I might someday decide to invest in some individual stocks, but it’d be “for fun” and with a tiny amount of money I’d be okay with losing.

    Plus, in my industry, we generally need to get permission from our employer before we make any transactions in individual stocks, essentially to make sure it doesn’t inadvertently look like insider trading based on what other attorneys in the firm are working on, and the non-public information the firm technically has access to. (I’m not sure how long it generally takes firms to give permission for trades, but that extra step is another disincentive to get into more “active” investing.)

    1. Hi Xin –
      Completely agree there – despite all that work, expertise and knowledge they can’t beat the market consistently.

      But I’m all for people actively investing a little for fun as you say, the same as I’m all for people having a flutter on the horses as they wish.

      And that permission to trade things is also another good one, lots of connected industries (quite rightly) limit their staff’s personal investments.

  8. Sounds like you have issues with blokes! I don’t get the sexism and inverse snobbery! People in the city work hard, pay taxes, create jobs and contribute to the economy.

    Back to the post 🙂

    Passive funds are better cause their fees are 1 percent lower. Plus some active funds only beat passive in short term cause of luck not skill. Over the long term passive funds are better for most people.

    Btw like the blog and good luck with your fire journey.

    1. Hi Adam – Yes I do have issues with the patriarchy. Moreover, I think it’s appropriate to delve into how people are funded, and whether their actions are really driving the greater good of the country as a whole. Life is not black and white, and as a man you experience all the benefits of the patriarchy and none of the downsides.

      I see we agree that active managers only beat passive due to luck – and I’m saying I don’t think this luck should be heavily financially rewarded. So I vote with my money and don’t pay them.

      1. “as a man you experience all the benefits of the patriarchy and none of the downsides”
        Yeah, those nice benefits like being 80% of the suicide victims, 93% of workplace fatalities and combat deaths, 76% of homicide facilities, 61% of homeless people, getting more jailtime for the same crimes, but almost never child custody (16-20%), smaller average live span, higher retirement age in some countries, military draft for men only in some countries, and being expected to be the main bread winner (and thus being limited in the choice of profession). I’m happy for all my privileged bros! So happy, that I’ll ridicule my bros for diving into the shark tank that fund management is.

        Back to topic: I’m diversifying at the moment. Most goes to passive funds, some goes to active funds, some to property funds, some to P2P and the occassional crypto gambling. We’ll see in 10 years who did better, I may think about rebalancing at some point. The reason for active funds: Higher volatility for the ones I buy monthly, the hope for lower drawdown during the next crash for existing money. But they need babysitting… main investment will be passive.

  9. Passive investing is way easier and it’s the best fit for most investors. Anyone can invest by themselves with passive indexing.
    I don’t like the pay structure of active funds either. If they lose money, why do I have to pay them? They should only get paid for performance. Good point about the men too. Never thought about it that much, but you’re right about that.

    1. Hi Joe, nice to see others are also fans of passive investing. And yeah, it doesn’t sit right fund managers get paid handsomely for bad performance as well.

  10. ok, i just yesterday put out a post about my individual stock picks. i hate when those get confused with active fund management. i’m not paying anything except the small commission for buys and sells. i don’t use any of those analysts except for a newsletter purchase for 100 bucks a year. i just like to make the distinction between picking your own stocks and actively managed funds. it drives me nuts. individual stock picking sure isn’t for everyone but you can do well with a level head and some common sense.

    1. Hi Freddy – I agree, there are different types of active investing – paying an active manager or picking the stocks yourself. I have to say personally
      I don’t think I’m lucky enough to pick my own stocks, hence I go passive.

  11. Yep, it always struck me as a bro-heavy industry. I’m not really into investing much (beyond retirement funds, that is). But if/when I do dip a toe in that water, it’ll be index funds all the way.

What do you think?