What caught my eye this week.
I often fret that we don’t bang the drum enough for passive investing on Monevator these days.
It’s not that we’ve changed our minds that using index tracker funds is the way forward for most investors. Far from it!
It’s more that if you bang a drum every week, you start to feel like a slave – and regular readers start to get a headache.
Monevator made its bones championing passive investing more than a decade ago, when coverage was scant in the mainstream British media. There’s a ton of articles in our archives on why and how to do it.
Maybe we should update and republish them more often, to give them a fresh airing?
The trouble with a blog – unlike with a book, say – is you never know where someone is starting from. A reader could be on their 500th article, or their first.
I should use our fancy new email system to create some kind of automatic crash course in passive investing for new subscribers. Watch this space…
For the record, though, unless you have special access, some rare edge in selecting winning active funds – or you have non-standard aims like ESG investing or a desire for an unusual return profile – than the evidence supporting index funds has only grown.
Most people accept this nowadays. Even active manager redoubts like the personal finance section of the Financial Times, which wrote this week:
In the first six months of this year, nearly two-thirds (60 per cent) of actively-managed equity funds have fallen further than the market.
Yes, you read that right.
Actively-managed funds — where you pay extra for a team of well-remunerated fund managers to cherry pick stocks they think will outperform — have actually under-performed cheaper passive funds that simply track the nearest comparable index.
There’s also an interesting table showing how active managers have performed over ten years.
Note that some of the apparent better-than-average success – such as 63% out-performance in the UK market – can typically be explained by factors such as holding more small companies than the benchmark. (And if so, this might be replicated more economically by getting broad cheap exposure via a tracker fund, and marrying it with say a 20% allocation to small caps.)
Some of the outperformance though will be genuine alpha generated by skillful stockpickers. Never think active managers are lazy or stupid!
The opposite is true, which is why they find it so hard to beat each other. (The maths also guarantees a worse than average performance, after fees).
Slim pickings
I’m an active stockpicker, remember. I don’t think beating the market is the stuff of myth and magic.
No, the difficulty is you identifying who will beat the market ahead of time.
Get it wrong – as you probably will, statistically-speaking – and you’ve wasted 30 years in more expensive funds. You will retire poorer as a result.
Who needs you to take that risk? Only active fund managers, whose big salaries depend upon it.
So much for funds – here’s some evidence this week from Alpha Architect that most of us shouldn’t be picking stocks, either. Ho hum.
Have a great weekend everyone.
From Monevator
We’ve overhauled our broker comparison table – Monevator
From the archive-ator: Something to lose – Monevator
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
Martin Lewis warns households face £3,500 energy bills come winter – Yahoo Finance
Britain’s financial regulator unveils Consumer Duty for financial service firms – FCA
US GDP falls for second quarter in a row; in technical recession – CNBC
UK inheritance tax receipts jump 14% in a year to £6.1bn – ONS
Pension tax change to boost take-home pay for low earners – Which
Inflation sees average family spend £89 more a month on energy, food, and fuel – Guardian
UK car production nearly 20% down on last year – ThisIsMoney
The world has become less colourful [Thread] – via Twitter
Products and services
Savings choices at a time of high inflation [Search result] – FT
What are numberless cards, and could they help stop fraud? – Which
Parents urged to buy school uniforms early amid supply problems – Guardian
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Virgin Money ups its ‘linked’ savings account to a table-topping 1.71% – ThisIsMoney
Energy support bill: who is eligible for the £400 discount? – Guardian
Rich People’s Problems: “Should I ditch my Amex Centurion card?” [Search result] – FT
Seven things to know about the new pre-paid funeral plans – Which
Homes for sale with car-charging points, in pictures – Guardian
Comment and opinion
More Hemingway, less Faulkner – Fortunes & Frictions
Knowing what not to do and not doing it are different things – Behavioural Investment
Staying rich – Humble Dollar
Large fries with that? – Sex Health Money Death
Are kids worth the cost? [A couple of week’s old] – The Root of All
Interview with The Escape Artist about financial independence [Podcast] – ThisIsMoney
‘This time it’s different’ and other investing fallacies – Darius Foroux
How to make your grandchild a millionaire on £2,800 a year – ThisIsMoney
Three keys to successful investing – Novel Investor
What the Fed’s big balance sheet unwind means for markets [Podcast, nerdy] – Oddlots
Spend more mini-special
The other side of investing – Banker on FIRE
Why this advisor tells his clients “retirement is obsolete” – Think Advisor
What about all the FUN debt gave you? – Budgets are Sexy
Naughty corner: Active antics
Howard Marks: I beg to differ [PDF] – Oaktree Capital
Bonds attractive after first-half ‘horror show’ – Bloomberg via Wealth Management
Buffett’s pension – Humble Dollar
A collection of charts showing how markets will confound you – Compound Advisors
Be grateful for your trading losses – All Star Charts
There’s an ecosystem of [US] ETFs trading around Cathie Wood/ARK’s own products – Yahoo Finance
Crypto corner
Tim O’Reilly on how Web 3 compares to Web 2.0 [Podcast] – Rational Reminder
Kindle book bargains
The First Minute: How to Start Conversations That Get Results by Chris Fenning – £0.99 on Kindle
Thinking Better: The Art of the Shortcut by Marcus du Sautoy – £0.99 on Kindle
Banking On It: How I Disrupted an Industry by Anne Boden – £0.99 on Kindle
Amazon Unbound: Jeff Bezos and the Invention of a Global Empire by Brad Stone – £0.99 on Kindle
Environmental factors
The audacious Big Oil PR plot that seeded doubt about climate change – BBC
Where will the new Sizewell C nuclear reactor get its water from? – Guardian
Human pathogens are hitching a ride on floating plastic – Hakai
…and many more downsides of a wipe-clean world – BBC
Air conditioning is a climate disaster and Bill Gates is investing in this startup to fix it – CNBC
Tiny turtle rescued from a Sydney beach pooed ‘pure plastic’ for six days – Guardian
Singapore is turning multi-story car parks into farms – BBC
Deepwater windfarms’ turbulent future – Hakai
Off our beat
Remote, hybrid, or in-person? – AVC
Milder recessions, wilder careers – Dror Poleg
Tails, you win – Morgan Housel
How robots can help us act and feel younger – IEEE
The pandemic-era impulse purchases we grew to hate – Vox
90% of spreadsheets contain errors – Klement on Investing
And finally…
“If you live for having it all, what you have is never enough.”
– Vicki Robin, Your Money or Your Life
Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor. We may be compensated if you pursue these offers, but that will not affect the price you pay.
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
There are usually quite a few comments by now. Has Neverland broken the system? Hope all is well soon.
‘I should use our fancy new email system to create some kind of automatic crash course in passive investing for new subscribers. Watch this space..’
What a great idea! I’m one of those long term regular readers but I’d use it with my adult children who need to acquire a passive savings habit.
One of the best things about the Monevator blog is that it’s UK specific especially at a time when there’s a real divergence between this country and the US.
Keep up the good work TI.
@Onedrew — I suspect it was because I was late to publish this weekend, plus perhaps the regulars are exhausted by three weekends of epic debates and are having a rest haha.
I did delete a typically troll-ish comment from @NL that conflated my talking about passive investing with my recent returns from active investing, when he knows fully well I’ve been an active investor since day one of the site whilst suggesting most are best investing passively, @TheAccumulator is anyway our practicing passive champion, and the latter has written several hundred articles on passive investing over the years.
In other words, just trying to be disagreeable as usual and to confuse new readers / sow discord. I reluctantly introduced (after 10+ years of similar, and for only the second time for a specific reader) a delete on sight policy for his comments but he snuck in a couple of constructive ones recently (by no means fawning but actually adding something of value) and given that I hate deleting any reader comments, I let my guard down. A dog that bites once etc.
@Nearlyrich — Thanks for the feedback, will definitely need to look into this!
My investing ponderables this weekend.
How can a near 10% bounce in the markets feel so darn unconvincing?
For how much longer will my patience run with my highly regrettable emerging markets allocation?
Why would any reputable firm feel the need to integrate crypto (web 3.0) gubbins into their systems to support payment functions that they’re perfectly capable of implementing anyway without intermediating tokens? (I know the answer to this one – they wouldn’t, which is why they aren’t doing it!).
When I was first introduced to the argument 25 years ago, the passive vs. active argument was something that still had detail and nuance. Why did active equity investing and domestic govt bond investing produce information ratios of zero, while global govt bond investing, credit and FX produced positive information ratios? Why did macro investing work but equity long-short didn’t?
It was already totally mainstream though. Here is a page from a presentation I did to analysts in 2000 (https://imgur.com/kEM579U). It was just a few pages early on in chapter 3 on the course in portfolio management. Everyone knew index tracking was better for domestic large cap equities.
These days it’s just become a blanket statement: all active investing doesn’t work. Like some religious belief: “though shalt not actively invest”. It’s not true but who cares about that. Sharpe’s Arithmetic of Active Investing is now quoted like a physical law when it was just a toy model.
It’s not that passive investing is a bad idea for some markets, most especially equities. Not at all. It’s a very good idea. I only invest passively in equities and mostly passively in govt bonds. Beyond that though I invest mostly in active funds.
These days, why does everything have to be simplified to such a degree that information is lost? Why do people only want simple ideas that appeal to their beliefs, rather than complexity, nuance and detail. I just don’t get it.
Seems like a good point to pass on a little message – “thanks!”
Years ago my small ISA pot was languishing in IUKD.L when I read an article on here about building a global passive portfolio. I had/have a fairly high risk tolerance, less than £20K invested and an appreciation for keeping things simple so I really latched on to the bit in the article about Vanguard LifeStrategy. I went for LifeStrategy 100 (didn’t want to dampen returns/volatility and lose the chance of bigger gains with relatively little to lose). I stuck with it and fast forward a good few years I broke through the 6 figure barrier a little while ago.
I guess the message is don’t assume everyone is as clued-up as some of the regular commenters on here talking about yield curves and crypto wizardry. Don’t neglect the really simple stuff . I’m just happy that I went through my affairs, made sure I knew what pension schemes I had (little final salary scheme from the late 90s, decent chunk in Scottish Widows that’s now in Vanguard at lower fees, how many years left to get full state pension etc. ) and am now confident I will have a good retirement at state pension age, which is 68 for me. Shouldn’t take much more to lower that to 65 the way its going and once that’s done I’ll aim for 60 etc etc. Anyway this has turned into a longer post than expected but I’ll continue to read with interest…and maybe as retirement gets closer / those swings get bigger I’ll be convinced to add some bonds in to the mix 🙂
@ZXSpectrum48k — Despite our occasionally debates about this, I am on the same page as you broadly in that I believe edge exists, it’s not impossible to buy and benefit from it, and I’d agree too that different markets present different opportunities. I allude to as much above, and as you know I invest actively under my own steam, for my sins.
However were you to start a blog for private investors, I think you’d soon discover why blanket statements might deliver the biggest bang for the buck. Probably 95% of people who don’t know any better (more so five years ago but it still exists) come to investing with the idea that skillful managers will pick winning stocks and smash the market. This is reinforced by literally all non-passive fund advertising, and a paucity of confrontational index fund advertising for that matter.
It is reinforced by the reality that in almost all areas of life, those with money/resources discover you get what you pay for, and paying more is better, albeit with diminishing returns. So index investing feels weird.
The amount of bandwidth and research the average person is prepared to put into deciding their investing strategy is probably a magnitude less than they’d put into deciding what car to buy.
Given the marginal benefit of slightly outperforming a market by stumbling into an active fund that beats the market – and the unlikelihood of having enough of it to make much difference in a broadly diversified portfolio – I’ll suggest all week long to these people that they buy a LifeStrategy 80/20 or 60/40 or similar and get on with their life.
I understand you’ll often bring non-market-beating aspects of the return profile in here; for the average person with their two hours a year of time allocation I’d still suggest that’s best achieved by balancing cash/bonds with equities, rather than spending their two hours looking for something more complex that is more likely to blow up in their face.
Of course you’re seeing the matrix and operating at a level far beyond that average person — you were giving presentations to analysts 22 years ago. Frankly, you’re not the target market for well-meaning advice for retail investors. 🙂
Interesting takeaway in Dror Poleg’s headline of milder recessions, wilder careers. I’d hate to have started out in today’s workplace, obvs it’s hard to imagine my twenty-year old self from the other end of the career telescope, but the unreliability and endless hustling and some of the pseudo-intellectual BS about work would not have suited my temperament, there’s too much game-playing.
But recessions have become milder – I first looked for a job in Thatcher’s first recession in ’82 and that was brutal. OTOH the benefits system was much less evil. When I took in my UB40s there were just plastic chairs and t’other side sat behind ordinary desks without all the bulletproof glass and aggro that seems to be the case now.
As an old git the form of modern work doesn’t bug me, but that’s because I’ve never done it at the full-time intensity of my former self, and never needed to buy in to the success or otherwise of the client firms, straightforward hit and run design jobs. I started to grudge the claims on my time in the end, not that they were that onerous, but I was prepared to pull all-nighters to get myself off the critical path, and it breaks up one’s ability to take extended periods away.
Anyway, the concept of greater flexibility for employers perhaps making capitalism more efficient but working for capitalists full-time of necessity much more horrible resonates with me.
I am mostly passive, but can see the need for active (passive would not exist sensibly if no one was commiting to active approaches…), and where active clearly offers something different e.g. green funds, or specialist sectors where the average person has no real time to worry about or find out about the main and future players e.g. a solar panel company in another country etc. In such cases, maximal returns is probably not the primary objective either.
I don’t necessarily think the active management industry is working though as all the risk is taken by the investors. Yeah, the fund manager and/or company may suffer reputationally, but the only thing certain in a fund managers life/fund is they will get their fees regardless. Neil Woodford walks away, and we now have the Cathie Wood (ARKK) products cratering and she is now using the Neil Woodford defence which was basically ‘give me more time and your money and all will/would have been fine’ plus ‘look at my previous performance’ (i.e. my good, albeit it, educated guesses based on my slightly extra knowledge due to expensive research teams). Obviously, I am being flippant here, but that is pretty much the position.
The above is my problem with active management. Guys in the pub or that attend sports games and shout and swear for their teams believe in technology/AI, crypto and disruptive technologies, and eventually many of those sectors will likely become more important. The idea of paying someone a huge fee to pick these stocks who can walk away if the exercise fails with no real financial consequence is not a business model I really want to be involved in.
Active management at the professional level needs cleaned up. I don’t know how this would best be done, but if you told someone that you know of an industry where most of the people doing the job are not delivering any benefit more than a ‘do nothing’ equivalent, are extremely well paid, can defend their bad performance by saying ‘judge me over the long term i.e another 5 years’, but even then, if it all fails over the long term and the rug is eventually pulled out, they get to keep their millions, but joe public who gave them money loses substantial proportions of their life savings, I would guess many would rightly be saying to me ‘why would I want to put my money into that industry?’
I don’t have any answers and I like this blog because it treads the honest line/approach of understanding the realities but also shows the ‘benefits’ of active investing, which to me I personally view as being less about believing in improved returns, but more as allowing personal choice and allowing investors to rise/fall by their own convictions – this I am happy with, and see the benefit. The fact the average investor who knows nothing but just wants to invest is being duped by some ‘star’ fund manager marketing or news article in the wider media, I am less so keen on.
Serious question to wider readers here: If the expected return for equities (index) was 0% and there was a transparant return after all fees metric visible for each of last 1,2,3X,… years required on every fund/ETF or even at fund manager level, that was perfectly comparable over time for all funds/ETFs, and survival bias was visible in the sense that people understood the existence of all the previous closed funds, do we really think people would be happy paying ‘star’ fund managers to be millionaires for the luxury of the clearly visible returns that are way below the market?
If we understand active management simply as a means to allow convictions to be stated and money allocated accordingly then it is absolutely fine, and fund managers just become the middle men/women with convictions. The fact that most people don’t understand key aspects of active and passive investment is the problem here.
Interesting comments
I was always unusually interested in Pensions from the get go rather than Houses which always caused great merriment amongst my compatriots back in the day
Arguably I have had the last laugh?
After saving religiously with Scottish Widows ,Norwich Union etc with no idea of costs I tried a mainstream M&G Fund with and without a Pension wrapper
The performance of both funds was exactly the same ie my at that time 40% tax relief disappeared into the Pension company costs-a lightbulb moment!
One of many similar moments-exited intact from Equitable Life due to Motley Fool post-that was a close shave!
Decided to do all myself after a reputable IFA gave a long term projection of his costs-would have cost me half my pension!-honest man!
Discovered then my global costly Investment Trusts (Alliance Trust,Witan etc ) were just closet index trackers at the same time as learning about John Bogle and Vanguard
Went to 2 Vanguard Global index tracker funds only many years ago- for both equities and bonds- and have been there ever since
Sell units for income as required etc etc
Read and learn all the time about investing which at the moment(76-18 yrs rtd) continues to reinforce the fact that my current investing style is suitable for me
Don’t have the ability or enough interest for active investing plus I have other things to do(Index fund portfolios suit long periods of travel away from home ie as work best when left alone and wife and were I keen on travelling!)
Know thyself and keep learning,save as much as you can,live frugally and don’t trade did it for me-so far!
xxd09
This made me smile…
“The amount of bandwidth and research the average person is prepared to put into deciding their investing strategy is probably a magnitude less than they’d put into deciding what car to buy.”
I don’t know anything about cars so I paid for a company to buy one for me. I spent about 15 minutes on the whole thing. Passive motoring?
Read the SPIVA reports if you want to know why active investing is betting against the odds. Read the detailed reports and you will see that not only are your chances of outperforming poor but that outperformance doesn’t persist and bottom quartile funds are more likely to outperform in the next period than top quartile.
If you haven’t time or inclination to study then these graphics are a quick way to get the message https://www.spglobal.com/spdji/en/research-insights/spiva/#us
With regards to new readers/beginners, I have often thought a way to approach this would be a tab/link on the home page to a “Beginner’s Guide” or “Start Here”. There you could have a bit of an explanation on how the site works and links to the relevant posts for beginners to read first.
Just a minor suggestion for what I consider is the best investing resource on the web!