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Weekend reading: Does the passive label put people off index funds?

What caught my eye this week.

I remember the first time I heard the phrase ‘passive investing’ uttered by The Accumulator.

Or at least I think I do – I’m pretty sure I dozed off midway through the sentence.

I disliked the passive investing label from the start. Several years and hundreds of articles later, it still sounds a bit defeatist.

Words matter. As Preston McSwain recalls in an article I link to below:

[Investment expert] Charles Ellis was once asked: “What is the biggest risk investors face when investing in index funds?”

His answer?

“Being called passive.”

Yes, regardless of your investment background, deep down you are likely to be more attracted to an investment or firm that sounds dynamic and vibrant versus one that sounds docile and inert.

I can relate to that, for my sins. In contrast, ‘index investing’ I can easily get behind. Indexing sounds faintly clever and technical. Comfortingly nerdy.

It was also how I began investing nearly 20 years ago, and it was the reason I counted myself fortunate in snaring The Accumulator to write for Monevator a few years back.

I believed a portfolio of index funds was the best approach for most everyday investors, and still do. But given I was increasingly off in the weeds nurdling with my active investing [1], it was crucial to get somebody on board who was passionate about them.

And passionate my new co-blogger was – as passionate as any stock picker I’d ever met. He was deeply excited about expense ratios and the merits of rebalancing quarterly versus annually and whatnot. Things that mattered, in other words, rather than things which sounded good.

Which is probably why he wasn’t so phased by the weedy sounding ‘passive’ investing label. He gets his excitement elsewhere, as he’s written many times.

So passive investing – a term The Accumulator had picked up in his copious US reading – came with him to this site, and we even named our dedicated subsection [2] accordingly.

But I’m made of weaker stuff, and I never loved it.

Others seem to increasingly feel the same way. Some have more sensible reasons, too.

As active costs fall, indexes proliferate, and supposedly passive investors shoehorn more esoteric ‘factor’ plays into their portfolios – rather than just tracking the global market – the lines are blurring.

Then you have all the hedge funds trading ETFs, which show up in some indexing statistics but are the antithesis of a passive approach. It’s all rather muddled.

I read several good articles and a podcast on this theme this week:

These posts may confuse new investors, who I feel should learn the basic terminology [2] before challenging it.

But once you know why index funds tend to beat their active counterparts, and why a *cough* passive approach is likely to turn out better than a lot of active management such as market timing attempts or sector chasing, it’s interesting stuff to ponder.

It’s also something I’m thinking about as The Accumulator does seem to be approaching the end of the first draft of our infamous book.

Should we celebrate the passive investing label in our book title and pitch? Or avoid it, and perhaps sell more copies and reach more people?

News

Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1 [8]

[News update: I’ve pulled The Telegraph as you now need a registered account to read even the free articles]

London property prices blamed for record exodus – Guardian [9]

Surprise (modest) upgrade to UK GDP growth in first-quarter – BBC [10]

Student loans: Use of RPI costs graduates up to £16,000 – Guardian [11]

Retirement ‘wake up’ packs to be sent to help protect pension savers – MoneySavingExpert [12]

Women have become much happier at work over the past decades. Men less so – The Economist [13]

Products and services

Energy bills rise by £52 for 11 million households as 19 suppliers announce price hikes – ThisIsMoney [14]

Mind the pensions gap: who’s at risk and what to do about it [Search result]FT [15]

Virgin Money launches one-year savings account that pays you in Air Miles – ThisIsMoney [16]

RateSetter will pay you £100 (and me a bonus) if you invest £1,000 for a year via my affiliate link. They now handle ISA transfers, incidentally – RateSetter [17]

Gap narrows between two-and five-year mortgage fixes [Search result]FT [18]

Is NS&I set to slash yet more deals? – ThisIsMoney [19]

Emerging market passive investors to be put into Argentine and Saudi stocks [Search result]FT [20]

Hotel booking sites could be forced to stop claiming ‘one room left’ – Guardian [21]

Save thousands on university fees by studying in Germany, Sweden, Hong Kong and Australia – ThisIsMoney [22]

Comment and opinion

Why UK house prices could stay flat for 20 years – UK Value Investor [23]

A few snappy thoughts about money – Morgan Housel [24]

Proof negative – Above the Market [25]

High valuations still look the biggest risk to the US stock market… – Bloomberg [26]

…but are they justified by soaring profits? – Calafia Beach Pundit [27]

Brexit and investing: Panic early or not at all – Simple Living in Somerset [28]

0% credit cards — more expensive than you think [Search result]FT [29]

Five famous market gaffes – The Value Perspective [30]

Twists and turns in the Tesla story – Musings on Markets [31]

Power is the ability to control your own life – The Escape Artist [32]

Brexit

Brexiteers calling Government’s own impact report ‘Project Fear on speed’Guardian [33]

Brexit vote revisited – DIY Investor UK [34]

There is no ‘Brexit dividend’ for motor industry, says head of motor industry trade body – Guardian [35]

Will someone please put Danny Dyer in charge of the Brexit negotiations – NME [36]

Kindle book bargains

Rivers of London by Ben Aaronovitch – £0.99 on Kindle [37]

Eye of the storm: 25 years in action with the SAS by Peter Ratcliffe – £0.99 on Kindle [38]

How To Be F*cking Awesome by Dan Meredith – £0.99 on Kindle [39]

Off our beat

You see what you want to see – Of Dollars and Data [40]

The secret to tackling workplace nerves – The Pool [41]

One sentence with seven meanings unlocks a mystery of human speech – Wired [42]

Cheap bacon: How shops and shoppers let down our pigs – The Guardian [43]

Inside the minds of Elon Musk’s fans – The Verge [44]

Rising seas: “Florida is about to be wiped off the map”The Guardian [45]

And finally…

“One way to create an attractive risk/reward situation is to limit downside risk severely by investing in situations that have a large margin of safety. The upside, while still difficult to quantify, will usually take care of itself. In other words, look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones.”
– Joel Greenblatt, You Can Be A Stock Market Genius [46]

Like these links? Subscribe [47] to get them every Friday!

  1. 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”. [ [49]]