Passive vs. Active Portfolio Mgt ?

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slipp1229
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Passive vs. Active Portfolio Mgt ?

Post by slipp1229 » Thu Aug 24, 2017 2:00 pm

Interesting Barron's article on how the huge rise in Passive Index Investing may be changing the "Efficient Market" and might
move Active Portfolio Mgt. back into vogue. Vanguard is referenced extensively so I'm curious to hear the BH's take on this article?

http://www.barrons.com/articles/man-vs- ... 2BnY5JZFUu

Slipp

afan
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Re: Passive vs. Active Portfolio Mgt ?

Post by afan » Thu Aug 24, 2017 2:26 pm

Entertaining new excuse for active managers under performance. When an active managers has lousy results the resulting funds outflow forces them to sell stock to meet redemptions. When they have to sell stock, they have no choice but to sell the shares in which they are overweight??? It would seem they could sell the shares they consider the least appealing, but that does not make for a good excuse.

Of course, as long as the active managers outperform the market then they will not see redemptions so they will not have to sell to raise cash.

I assume papers.keep publishing nonsense like this because their subscribers are mainly active managers who want to hear that the bad market for their field is coming to an end.

I also like the implication that active underperformance is a recent phenomenon, conveniently forgetting that index funds were created in response.to long term evidence of active managers underperforming the indexes.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Tallis
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Re: Passive vs. Active Portfolio Mgt ?

Post by Tallis » Thu Aug 24, 2017 2:31 pm

It seems to me that it's the same old argument, that widespread passive index-based investing creates mispricing that active investors can exploit.

As usual, there is no data given showing that this is the case.

I was surprised by the writer comparing index funds and ETFs to subprime mortgages, as if owning an S&P 500 fund is the same as buying collateralized debt obligations based on "liar loans."

Nothing here to change my asset allocation.

zzpat
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Re: Passive vs. Active Portfolio Mgt ?

Post by zzpat » Thu Aug 24, 2017 2:42 pm

IMO, ETFs are the fast food of investing. Acceptable in the short term but not so good in the long. Any index fund has good and bad stocks. Why invest in companies that are bad when every company you invest in can be good?

zenon
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Re: Passive vs. Active Portfolio Mgt ?

Post by zenon » Thu Aug 24, 2017 3:03 pm

zzpat wrote:
Thu Aug 24, 2017 2:42 pm
IMO, ETFs are the fast food of investing. Acceptable in the short term but not so good in the long. Any index fund has good and bad stocks. Why invest in companies that are bad when every company you invest in can be good?
Wow, I've never met an investor who only makes good bets. How do you manage that?

CantPassAgain
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Re: Passive vs. Active Portfolio Mgt ?

Post by CantPassAgain » Thu Aug 24, 2017 3:06 pm

zzpat wrote:
Thu Aug 24, 2017 2:42 pm
IMO, ETFs are the fast food of investing. Acceptable in the short term but not so good in the long. Any index fund has good and bad stocks. Why invest in companies that are bad when every company you invest in can be good?

Are you talking about ETFs or Index mutual funds? Or just index ETFs (there are active ETFs too), and not mutual funds? Or....?

Also how do you avoid the bad stocks while only picking the good stocks [OT comment removed by admin LadyGeek].

zzpat
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Re: Passive vs. Active Portfolio Mgt ?

Post by zzpat » Thu Aug 24, 2017 3:26 pm

CantPassAgain wrote:
Thu Aug 24, 2017 3:06 pm
Are you talking about ETFs or Index mutual funds? Or just index ETFs (there are active ETFs too), and not mutual funds? Or....?

Also how do you avoid the bad stocks while only picking the good stocks [OT comment removed by admin LadyGeek].
I don't invest in mutual funds or ETFs.

Earnings reports are the key. Once I find a stock that exceeds the S&P (a company like RACE) then I listen to earnings and I need three things, a rising top and bottom line and higher guidance.

https://www.google.com/finance?chdnp=0& ... 2Aa2j6ygAw

CantPassAgain
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Re: Passive vs. Active Portfolio Mgt ?

Post by CantPassAgain » Thu Aug 24, 2017 3:47 pm

zzpat wrote:
Thu Aug 24, 2017 3:26 pm
CantPassAgain wrote:
Thu Aug 24, 2017 3:06 pm
Are you talking about ETFs or Index mutual funds? Or just index ETFs (there are active ETFs too), and not mutual funds? Or....?

Also how do you avoid the bad stocks while only picking the good stocks [OT comment removed by admin LadyGeek].
I don't invest in mutual funds or ETFs.

Earnings reports are the key. Once I find a stock that exceeds the S&P (a company like RACE) then I listen to earnings and I need three things, a rising top and bottom line and higher guidance.

https://www.google.com/finance?chdnp=0& ... 2Aa2j6ygAw
Earnings reports. Why didn't I think of that. :oops:


Nate79
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Re: Passive vs. Active Portfolio Mgt ?

Post by Nate79 » Thu Aug 24, 2017 8:26 pm

zzpat wrote:
Thu Aug 24, 2017 3:26 pm
CantPassAgain wrote:
Thu Aug 24, 2017 3:06 pm
Are you talking about ETFs or Index mutual funds? Or just index ETFs (there are active ETFs too), and not mutual funds? Or....?

Also how do you avoid the bad stocks while only picking the good stocks [OT comment removed by admin LadyGeek].
I don't invest in mutual funds or ETFs.

Earnings reports are the key. Once I find a stock that exceeds the S&P (a company like RACE) then I listen to earnings and I need three things, a rising top and bottom line and higher guidance.

https://www.google.com/finance?chdnp=0& ... 2Aa2j6ygAw
Any chance you write a monthly newsletter? :)

jbolden1517
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Re: Passive vs. Active Portfolio Mgt ?

Post by jbolden1517 » Thu Aug 24, 2017 8:44 pm

slipp1229 wrote:
Thu Aug 24, 2017 2:00 pm
Interesting Barron's article on how the huge rise in Passive Index Investing may be changing the "Efficient Market" and might
move Active Portfolio Mgt. back into vogue. Vanguard is referenced extensively so I'm curious to hear the BH's take on this article?
That's an older article. But let me grab a quote from it Savita Subramanian, an equity strategist at Bank of America Merrill Lynch, has extensively studied the impact of passive strategies. She found, for instance, that buying the 10 stocks most underweight by active funds, while selling the 10 that are most overweight by active funds, earned annualized returns near 19% since 2008. Active funds are lagging behind passive funds, and “every time they see redemptions, they’re forced to sell overweight stocks to raise cash,” Subramanian says. Such “crowding risk is particularly acute at quarter end, when allocators tend to rebalance.”

Also, companies with the highest crop of shares held by passive funds are becoming more volatile, since heavy passive ownership shrinks the float of shares available to other investors. “When you buy big stocks that are in many indexes, you tend not to worry about liquidity,” Subramanian says, “but they may not be as liquid as you think.”

Subramanian compared the 100 stocks most widely held by passive investors, and found these have a “true float” of 81.5%, versus an average 85.2% for all stocks. As a result, those 100 stocks had historical volatility near 24.5% (versus 20.9% for all stocks) and saw maximum price declines of 30.3% (versus 23.7% for all stocks).


Savita Subramanian is someone whom IMHO Bogleheads should keep their eyes on. She's consistently been one of the smartest critics of indexing around. I wish that Barrons didn't just summarize her I'd love to read these quotes fully blown out. I'm not sure what "true float" means and why a 3.7% difference in true float would create a 40% difference in volatility. But I suspect the full length version of those comments was quite a bit more informative.

slipp1229
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Re: Passive vs. Active Portfolio Mgt ?

Post by slipp1229 » Tue Aug 29, 2017 12:10 am

Excellent ... Great feedback, But, back to the TOPIC ... Passive vs. Active Portfolio Mgt.
The consensus seems to be during good times (last 7 years) both Passive and Actively Managed portfolios looked smart.
During bad times (starting 2007) the Passive portfolios drop as do the the Active ... but the Active have potential to drop more/less
depending on the Active Mgrs (Advisors) investment choices are at the time. Long term ... Indexing just rides out the Good and Bad cycles and
takes the historical annual returns as they may occur (+7-10%). Great.. but only if your timeline allows for this! The immediate "sequence of returns" for the soon to/or already retired is dangerous for many Baby Boomers ... Thus the recent HUGE onslaught of Retiree Money Managers. There is a Baby Boomer Bonanza by the Yuppy Financial Mgrs. (remember them?) happening now. Active Mgt. might be the correct choice depending on your time horizon and age... Passive Indexing might be dangerous for the 55-60+ crowd. :shock:

Slipp

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Portfolio7
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Re: Passive vs. Active Portfolio Mgt ?

Post by Portfolio7 » Wed Aug 30, 2017 11:41 pm

Passive investing still has a few things going for it imho. :wink: If I were to make a list, well, I think I'd start with this:

1. Lower Cost. This is huge. 50 to 100 basis points over 20 years makes a big difference in your end point.

2. Simplicity. No need to identify superior active funds/managers, or worry if they start underperforming.

3. Lesser time commitment (see item 2).

4. You can control your volatility risk. Active managers don't know your preferences, and may take much more risk than you realize.

5. A history of relative outperformance vs active funds (see item 1).
An investment in knowledge pays the best interest.

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privatefarmer
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Re: Passive vs. Active Portfolio Mgt ?

Post by privatefarmer » Thu Aug 31, 2017 3:29 am

slipp1229 wrote:
Tue Aug 29, 2017 12:10 am
Excellent ... Great feedback, But, back to the TOPIC ... Passive vs. Active Portfolio Mgt.
The consensus seems to be during good times (last 7 years) both Passive and Actively Managed portfolios looked smart.
During bad times (starting 2007) the Passive portfolios drop as do the the Active ... but the Active have potential to drop more/less
depending on the Active Mgrs (Advisors) investment choices are at the time. Long term ... Indexing just rides out the Good and Bad cycles and
takes the historical annual returns as they may occur (+7-10%). Great.. but only if your timeline allows for this! The immediate "sequence of returns" for the soon to/or already retired is dangerous for many Baby Boomers ... Thus the recent HUGE onslaught of Retiree Money Managers. There is a Baby Boomer Bonanza by the Yuppy Financial Mgrs. (remember them?) happening now. Active Mgt. might be the correct choice depending on your time horizon and age... Passive Indexing might be dangerous for the 55-60+ crowd. :shock:

Slipp
Passive indexing isn't the problem for the older crowd or those with less risk tolerance. Percent in equities would be the problem. If you're older and need the money sooner then you should have some in fixed income. Using active equity funds is no safer than passive. You have a 50% shot of being more volatile and a 50% shot of being less volatile in an active fund.

This is a really simple point but for some reason not grasped by vast majority of investors : the collective pool of active investors mirrors the collective pool of passive investors. Passive index funds will mirror whatever the active investors do as a group. So buying one active fund essentially gives you a 50% chance of not falling as far in the next crash but also a 50% chance of falling farther than the index (assuming the fund is 100% equities).

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privatefarmer
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Re: Passive vs. Active Portfolio Mgt ?

Post by privatefarmer » Thu Aug 31, 2017 3:32 am

Portfolio7 wrote:
Wed Aug 30, 2017 11:41 pm
Passive investing still has a few things going for it imho. :wink: If I were to make a list, well, I think I'd start with this:

1. Lower Cost. This is huge. 50 to 100 basis points over 20 years makes a big difference in your end point.

2. Simplicity. No need to identify superior active funds/managers, or worry if they start underperforming.

3. Lesser time commitment (see item 2).

4. You can control your volatility risk. Active managers don't know your preferences, and may take much more risk than you realize.

5. A history of relative outperformance vs active funds (see item 1).
I think we are conflating two things here : active stock picking vs market timing.

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Portfolio7
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Re: Passive vs. Active Portfolio Mgt ?

Post by Portfolio7 » Thu Aug 31, 2017 6:21 pm

privatefarmer wrote:
Thu Aug 31, 2017 3:32 am
Portfolio7 wrote:
Wed Aug 30, 2017 11:41 pm
Passive investing still has a few things going for it imho. :wink: If I were to make a list, well, I think I'd start with this:

1. Lower Cost. This is huge. 50 to 100 basis points over 20 years makes a big difference in your end point.

2. Simplicity. No need to identify superior active funds/managers, or worry if they start underperforming.

3. Lesser time commitment (see item 2).

4. You can control your volatility risk. Active managers don't know your preferences, and may take much more risk than you realize.

5. A history of relative outperformance vs active funds (see item 1).
I think we are conflating two things here : active stock picking vs market timing.
How so? Active funds generally carry higher fees, and the AA can definitely shift on you as the fund manager skews their holdings. You incur manager risk, etc etc. I really don't think those drawbacks necessarily apply to market timers, but if I'm missing something please let me know..
An investment in knowledge pays the best interest.

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David Jay
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Re: Passive vs. Active Portfolio Mgt ?

Post by David Jay » Thu Aug 31, 2017 7:26 pm

slipp1229 wrote:
Tue Aug 29, 2017 12:10 am
The immediate "sequence of returns" for the soon to/or already retired is dangerous for many Baby Boomers ... Thus the recent HUGE onslaught of Retiree Money Managers. There is a Baby Boomer Bonanza by the Yuppy Financial Mgrs. (remember them?) happening now. Active Mgt. might be the correct choice depending on your time horizon and age... Passive Indexing might be dangerous for the 55-60+ crowd. :shock:

Slipp
On the day that I retire (about 18 months out), I will have all of my living expenses from retirement to start of SS (age 70) in bonds, laddered such that the next 3 years withdrawals will always be in cash or ST bonds and the remainder in Intermediate Term. Where is my sequence of returns risk?
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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David Jay
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Re: Passive vs. Active Portfolio Mgt ?

Post by David Jay » Thu Aug 31, 2017 7:52 pm

slipp1229 wrote:
Tue Aug 29, 2017 12:10 am
The consensus seems to be during good times (last 7 years) both Passive and Actively Managed portfolios looked smart. During bad times (starting 2007) the Passive portfolios drop as do the the Active ... but the Active have potential to drop more/less depending on the Active Mgrs (Advisors) investment choices are at the time.
Whose consensus is that?

I suggest that the consensus of active managers is that active managers can outperform in down markets. But check out the last two major downturns on the SPIVA scorecard and you will find that active management did not outperform index funds in either 2001 and 2008. Market timing sounds good but simply has no record of success.

I like Bogle's classic quote: “The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently."
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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