The Active Versus Passive Debate is Not Binary

By John Reese (@guruinvestor) —  There is an undercurrent running throughout the investment community suggesting that active stock-picking is the root of many investor ills, and one that has robbed them of returns. I would argue, however, that the debate is more gray than black and white. Passive investing, an approach in which investors buy a broad cross-section of the market and weight holdings based on market capitalization, is a rules-based, disciplined strategy that strives to obtain the same return as the broader market. Active investing, also referred to as “stock-picking” involves the individual selection of securities by an investor […]

What Passive Investing Might Mean for Stock Pickers

Investors are trying to figure out how passive investing strategies might help, or hurt, individual stock picking, according to a recent article in The Wall Street Journal. The article says that new research is showing “how the rise of passive investing—tracking a basket of securities rather than picking individual ones—is changing the makeup of markets.” Investors are reviewing factors such as the percentage of a stock owned by index funds and the flow of dollars into and out of those funds as they evaluate whether to buy or sell shares. Although the research is new, says WSJ, stock pickers are […]

To Active Managers: If You Can’t Beat ‘Em, Join ‘Em

Arguing that the shift to passive investing is “really just a reflection of an even bigger move away from high-cost to low-cost funds,” a recent Bloomberg article suggests that active managers might want to consider offering their services as part of a complementary role to boost overall portfolio returns. Several arguments are offered, including: “It lets active managers be truly active.” If benchmark returns are coming from the passive portion of a portfolio, this allows the active manager to be “truly active and make high-conviction bets.” Such a dynamic increases investors’ ability to better tolerate underperformance on the active side. […]

Ritholtz on the Challenges of Active Investing

In a Bloomberg article from earlier this month, columnist Barry Ritholtz outlines some of the benefits and challenges inherent in active investing. He cites the following “desirable goals” and some corresponding impediments to those goals: Alpha: outperformance versus a benchmark. “Of all the reasons to be an active investor,” writes Ritholtz, “alpha may be the most difficult to achieve.” He underscores the significant hurdle that both fund managers and individual investors face when attempting to choose benchmark-beating stocks. Expressive: investing toward a specific goal. An “unstated” desire of many investors is to “use their capital as an expression of their […]

Research to Help Choose Between Active or Passive Investing

A new research paper by Vanguard provides a framework for the decision between active and passive investing, according to an article on the company’s website. The paper intends to help the decision-making process by “enabling investors to think more explicitly about their expectations and the risks they’re willing to accept.” Here are some variables the paper cited as important for investors to consider: Gross alpha expectation—the “ability to achieve successful outcomes through skill in selecting an active manager”; Cost of active management—”low cost is the most effective quantitative factor an investor can use to improve the chance of success;” Active […]