Some critics of passive investing say there’s “no such thing [1]” as truly passive investing. They point out [2] that even an investor who only uses index tracker funds has to decide:
- How to split their money [3] across the various asset classes. [4]
- Which indices / trackers [5] are the best in each class.
- How and when to rebalance [6] their portfolios.
- Which platform [7] to opt for, and whether to use ISAs, SIPPS, or both [8].
- What to buy [9]
the in-laws for Christmas.
That’s all true enough (especially the last one).
After all, Monevator is a site mostly about unwrapping the mysteries of passive investing. If such investing was utterly without nuance, we could have saved ourselves 1,000-odd articles over the past seven years!
But so what?
For every decision you need to make as a passive investor, someone else is making dozens if not hundreds as an active investor – almost by definition.
An active investor complaining that passive investing involves a lot of tricky decisions is like an air traffic controller being befuddled by a zebra crossing.
Moreover passive investing can be as complex or as simple as you want it to be [10].
My standard advice to new investors [11] has long been to put half their monthly savings into a high interest savings account and to invest the other half into a broad index tracker fund. Do that in an ISA or SIPP, repeat for 30 years, evolve as you learn more, and I’m confident you’ll get a good result.
You could even use a Vanguard LifeStrategy [12] fund and skip the cash bit.
Is it the perfect passive strategy? Probably not, but it’s super easy-to-implement, logic is on its side, and it’s inordinately easier than implementing an active strategy over 30 years – never mind actually beating the market by doing so.
Market cap trackers are just fine
That’s all a long-winded way of saying that straying from a bog-standard basket of market cap weighted index tracker funds is decidedly optional.
Indeed, our current view [13] around here is that there’s no magic in Smart Beta or equal-weighted indices. You’re simply taking on more risk for hopefully more reward, and in most cases you’ll also face a headwind of higher costs for doing so.
And while we’re all for considering tilting your portfolio towards value shares or small caps, we’ve stressed such factor bets [14] are no slam dunk to outperformance.
As such, they can safely be left in the ‘too hard’ pile if you want without any danger or feelings of foolishness.
You see, even the experts don’t agree about these issues, as this latest video from Sensible Investing [15] reveals:
As the Nobel Prize-winning economist Professor Eugene Fama says:
“The overall cap-weight market portfolio – including everything, not just stocks – model is always a legitimate portfolio.
In any asset-pricing model it’s always one of the so-called efficient portfolios.
But if you take, for example, our work seriously, what it says is there are multiple dimensions of risk and you can tilt towards these dimensions, so you can move away from the market portfolio towards these dimensions.”
In other words, start with the simplest, broadest vanilla trackers, and then research and invest where your passion takes you – and if that’s to the conclusion that simple is best [16] after all, then that is absolutely a-okay.
Check out the rest of the videos in this series [17]so far.