What caught my eye this week.
Those of you who frequent the naughty side of town – indulging in active investing despite being clued-up followers of a website that urges a passive approach – will enjoy Conor Mac’s reflections over on Investment Talk this week.
Why doesn’t he just sell all his individual stocks and go buy an ETF, Conor asks?
He’s no dummy. He knows the odds against outperformance and understands that:
To a layman, an investor’s dedication to beating the market over their lifetime appears absurd. The trade-off, time spent doing other things, is huge.
We each have a finite amount of time on this earth. To spend countless hours which I assume add up to years of one’s life, only to underperform the market, may appear wasteful. Insanity is repeating the same thing hoping for different results. Consider the aggregate of individual investors trying to beat the market. Most will fail.
Thus, on the aggregate level, these people look crazy.
So why indeed?
But for the benefit of newer readers – please know that I’m not judging.
I’m an active investor myself, and long ago debated the reasons why with my sensible and purely passive co-blogger.
Five star generalisations
Moreover something I love about the active investors among our Mogul membership is how self-aware they (you?) seem to be too.
Of course we’ve filtered hard for this kind of member. Both by sneaking them in through the backdoor of a blog about using index funds and also by stressing Moguls will not be promising Five Stocks To Pay For Your Porsche or the like.
I’m also aware that more than a few Moguls members just wanted to send a few extra quid our way, despite being entirely passive investors themselves. For which, enormous thanks!
Anyway, the end result is I don’t get the impression that our members expect easy or even especially probable wins.
Rather, active investing for them is a challenge or a passion or a hobby – but one with the tantalising if slim potential to deliver life-changing results on the side.
Indeed it’s possible Moguls will turn out to be a multi-year version of Conor’s reflective post.
For my part, active investing – stock picking – has been an endlessly fascinating game, that’s also gamified my wondering about the world around me. For most of the time I was fortunate that it was more profitable for me, too, though as I’ve conceded elsewhere the last 18 months has been testing that one hard.
Perhaps for you there are different motivations?
Or more likely you’re one of the Monevator majority who’s sensibly all-in on a global tracker fund and you think we’re crazy.
Which is more than fine, too, if expressed politely. Broad church here!
Active addicts should go feel seen at Investment Talk. I hope the rest of you enjoy cracking into this week’s links below.
Best of luck to Wales, England, Scotland, and Ireland in the games today!
From Monevator
The Slow & Steady Passive Portfolio update: Q3 2023 – Monevator
How to enjoy life like a billionaire – Monevator
From the archive-ator: How unmarried couples can protect their finances – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Buyer’s market fuels fastest fall in UK house prices in 14 years – Guardian
Troubled Metro Bank kicks of £3bn mortgage book sale – Sky
Portugal to scrap ‘unjust’ tax breaks for foreign residents – Guardian
Bed bugs threat from Paris? They are already here, say experts – Sky
London has just been named the best city in the world – TimeOut
Families should have more children to care for elderly, says minister – Guardian
Top 10 places to retire in the UK, rated – Which
Why a rout in global bonds is worrying – Reuters
Products and services
Starling Bank boosts current account interest to 3.25% – Which
NS&I pulls top fixed 6.2% savings rate after 225,000 sign up – This Is Money
Blackrock launches the first defined-maturity TIPS ETFs [US but notable] – ETF.com
Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Simple trick to secure best buy Natwest easy access account rate of 5.2% – This Is Money
British Gas extends half-price electricity on Sundays offer this winter – This Is Money
Get £50 free trading credit when you open an account with Interactive Investor. Terms apply – Interactive Investor
What’s happening with buy-to-let mortgage rates? – Which
Homes for sale with a blue plaque, in pictures – Guardian
Comment and opinion
Seven beliefs about money – Of Fortunes & Frictions
At long last, bonds once again matter – Morningstar
How to make the right type of withdrawal from your pension [Search result] – FT
I’m wealthy if I can… – Thomas Kopelman
Five years of FIRE. Was it worth it? – Far and Wide
Retiring to a cabin in the woods – Financial Samurai
Can you make money ‘stoozing’ with a 0% credit card? – Which
The thin line between bold and reckless – Morgan Housel
Even a successful financial life will take a few hits – Humble Dollar
Asset class CAPM – Verdad
Three things investment people hate to admit – A Wealth of Common Sense
Charted: retirement age by country [Infographic] – Visual Capitalist
Naughty corner: Active antics
The importance of an economic moat – Flyover Stocks
Ruffer’s recession red flags and four moves to protect against them – Trustnet
Looking for an edge – Humble Dollar
Saddling up for the unicorn massacre [Search result] – FT
The top 40 high-yield blue chip UK stocks – UK Dividend Stocks
Kindle book bargains
The Simple Path to Wealth by JL Collins – £0.99 on Kindle
Mastering the Market Cycle by Howard Marks – £0.99 on Kindle
The Power of Moments by Chip and Dan Heath – £0.99 on Kindle
Think and Grow Rich by Napoleon Hill – £0.99 on Kindle
Environmental factors
September 2023 hottest on record by ‘extraordinary’ margin, say scientists – Sky
Cheap heat pumps on offer from energy firms – This Is Money
Britain’s greenest banks – Which
10,000 ‘superhero’ oysters seed a new offshore reef in the North East – ZSL
Are we outsourcing pollution? – Klement on Investing
Countries pledge $12bn to fund coral reef protection – Reuters
Robot overlord roundup
Excogitation – Indeedably
The AI boom-bust – Dror Poleg
Unbundling AI – Benedict Evans
Hallucinating machines [Search result] – FT
Off our beat
“Managed decline“: the uncertain future for British rail after cuts to HS2 [Search result] – FT
Respect and admiration [Podcast] – Morgan Housel
The nuanced impact of working from home on productivity – The Hill
The truth is always made of details – Raptitude
Fooling ourselves – Seth Godin
Are you old, globally-speaking? [Interactive tool] – Population.io
How a big pharma company stalled a potentially lifesaving TB vaccine – ProPublica
Discover your innate personality trains [Fun personality quiz] – Taiwan Design Expo
Full-time children: the 20-somethings who never grow up – Guardian
And finally…
“Money is, in other words, an entirely social phenomenon. If Jeff Bezos was to avoid a nuclear war by escaping to a bunker on his secret island lair and then emerge a year later as the only surviving human on earth, his billions of dollars would be of no value whatsoever; with no one to trade with, money is useless. Imagine he then wandered the earth and came across a primitive Pacific tribe that had somehow survived, and who exchanged value by sharing the prettiest shells they can find. Jeff could show them wads of paper with pictures of Benjamin Franklin on them, but it wouldn’t get him very far.”
– Rob Dix, The Price of Money
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Good philosophical stuff ….
We all have to handle money in some way and get into it at various levels
I started as self employed in a vocational well paid job with a wife in public service plus 3 kids-over 50 years ago
So had to manage my own money along with my wife’s public service pension
Still learning…..
“Active/Passive” investor is a bit of a red herring
We are all active investors up to a certain point -we make investment choices
I learnt my limitations along the way plus I had other demands on my time -jobs,wife and kids
Index investing a la John Bogle was the end game-so far -for me
Other amateur investors went further into the “jungle” with individual shares ,investment trusts etc -all of which I have had in my time but I learnt that I don’t have the time ,temperament or skills to live in that scenario -obviously very personal to me
Saving enough,living frugally and seriously watching costs were easier investment targets for me to aim for
So far so good-now 78 next month so end point of race in sight
“Many roads to Dublin”-mine actually worked-so far!
xxd09
There is a real buzz to be had from beating the market but the statistics are not in your favour! On another note would you consider a piece on Family Investments Companies, I’ve read a lot about the IHT benefits for buy to let portfolios, but could also be useful for passing large equity portfolios on to the next generation.
@Warren #1: there’s a 2 Feb 23 Monevator piece on FICs by Finumus. It’s very good.
https://monevator.com/family-investment-company-frequently-asked-questions-the-fic-faq/
The Evening Standard was beating the drum for passive investing again yesterday: https://www.standard.co.uk/business/small-investors-bottom-food-chain-fund-management-b1111799.html
@Bill G
I was reading articles like that on the demise of the actively managed unit trust regularly in the last century – and yet here we are still waiting
It suits people to believe that there are genius investors who can make the hard truths go away
So we get what we deserve – our Neil Woodfords and Sam Bankman-Frieds
I await the FCAs probe into private company valuations with some interest
Speaking as a Moggie who has no interest in active but wanting to support the great work of Monevator. I think most of us started by dipping our toes into individual shares unit trusts and then in my case ITs before moving to trackers. In my case I started with trackers before I discovered Monevator but it’s always good to find your tribe as long as it’s a wholesome one. Many will enjoy a side gamble on beating the market. I prefer blowing a few quid every couple of years at the races. The difference is in trying to beat the market disappointment is baked in. Even if you sell at a profit you may have sold to early. At least the nags get it over and done with in a few minutes.
Good luck everyone.
Pat.
Cheers for the shout out 🙂
So I’m a bit of both – but what’s been interesting is how much less interested I am in being an active investor once I pulled the trigger and retired early. It’s like the more time I have, the less I want to spend it in front of a laptop!!
@TI, Although I read this post yesterday, it was only this morning I realised the references to 80s pop band, Five Star.
[Apols, my reply to @Warren yesterday said “#1” but xxd09’s comment now @#1 only appeared today, and so my own reply should have referred to #2]
Do become a Mogul both to support this amazing and worthy site and to get the benefit from the deep dive pieces which Mogul tier gives access to.
Back in 09 @TI did a piece on economics of blogging comparing unfavorably with subsistence farming. In comments thread there, he mentions once hitting £350 p.m. with 1000 (email) subs (i.e. pre costs). Since Maven/Mogul launched in May this year he mentions that ~10x the “several hundred” paid subscribers to both tiers get email now (so ~5k, or ~5x the no. in 09) & that he and @TA now put in 30-70 hrs to site weekly. Scaling up p.c.m. ad rev linearly since 09 would imply before costs ad rev’s would still be equiv to less p.h. than the NMW. CPM rates may be higher (or lower) today than 09, and now there is the odd affiliate link, but without the paying subscribers I fear for future of this site, which I greatly rely upon for its trusted, impartial, informed and UK specific opinion and analysis and as a reliable and insightful jump off point for further research/ideas. Collectively, by subscribing to Maven or to Mogul we can safeguard this site’s future.
On the whole active v passive and index v everything else debate, I think the issue is misframed.
Indexing is an excellent (easy, effective and cheap) strategy. But it is one of many.
The relevant divides are really between:
– what the evidence has shown has actually ‘worked’ previously (i.e. versus the same benchmarks) after fees and frictions, and what has not; and,
– between those approaches where there are sound reasons to think that the success will continue (on a net of fees and frictions basis) and those where aren’t.
Exhibit 1: @TI many approaches article in 2015: https://monevator.com/there-are-many-ways-to-be-an-investor/ . What matters is evidence, interpretation and application to future odds of success.
Exhibit 2, Finumus in 2021: https://monevator.com/do-you-have-an-investing-edge/
You are unlikely to have an edge picking active funds or individual companies. See the excellent comments, esp. @Matthew’s wisdom @ #8 and @ZX’s deeply informed views at #25.
Even leaving aside stock and fund picking (remembering when discarding them that return skew shown by Bessembinder’s research and how median concentrated active manager portfolio likely to lag the index average even before costs); thay still leaves massive numbers of non global market cap indexing approaches which might have merit. Fama French factors, alternatives, unlisted, rules based trend following etc etc.
So, it’s not, has never been, and shouldn’t be a binary active v passive question.
wow that population.io site is like being hit in the face with a sledgehammer with “perspective” written on the side. So as a 46 year old if I retire at 65 there’s a 50/50 chance I’ll only need to squeeze 15 years worth of living expenses out of my retirement stash before I’m 6ft under. And really, I doubt my post 80 year old needs will be very extravagant if I do beat that coin-flip…definitely discourages the ‘one-more-year’ of work syndrome from point of view.
> Or more likely you’re one of the Monevator majority who’s sensibly all-in on a global tracker fund and you think we’re crazy.
Yes I am and indeed I do. But I still love you guys all anyway. Just like I may watch and even admire Evel Knievel jumping Snake River Canyon but not be crazy enough to try myself. Life would be boring without it. I figured there’s enough money to go around for us all. Happy hunting and thank you as always for the links!
For many years the AIC published its monthly data on Investment Trust statistics with a useful list of various indexes with performance over the same time periods. You could compare Global Investment Trusts to say the FTSE All World Index.
My preference was using NAV of various Investment Trust Sectors, I previously downloads of the stats from 2007 to 2017, as a whole I can safely say that these stats would not be a good marketing tool for Global Trackers…
The current and recent situation is that the US stocks increasingly dominate the Global tracker and the US market is very concentrated in a small number of large cap stocks, that situation may not last and the Global tracker may not always be the “only sensible choice”
PS I have a lot in Global trackers but when everyone thinks a global tracker is the only choice maybe …
I’m not sure the US would allow the S&P to fall too far given that most employees in the country have their retirement savings invested in the index. This is another factor to consider.
@SuperSabre – it’s sobering. The site’s coming up with 85 years life expectancy for me, but having now had two former managers pass away just after reaching scheme retirement age at 60 (for their FS DB pension); I’m determined not to have to work on beyond that age.
@All – couple of typos in my last comment – economics of blogging post was actually back in November 2008, not in 2009:
https://monevator.com/blogging-for-money/
Whilst “that return skew” should be “the return skew” and “thay still” should say “that still”. Apologies. Should have picked up on these in the 10 minutes’ correction window. Hopefully, it still more or less made sense.
@Hariseldon – excellent point.
I support global equities index tracking as a really good one stop shop, no effort solution, which will hopefully meet the needs of 90-99% of people out there as it’s likely (based upon SPIVA stats etc) to beat 90-95% of active equity funds over 15-20 year horizons.
But, does that actually mean that it’s the best possible solution overall? Almost certainly not.
However, it knocks for six either trying to stock pick or to try to pick the best active managers and funds, both of which approaches were unquestioningly promoted for decades by the press, by IFAs and by platforms against an ever increasing weight of evidence to the contrary.
Nonetheless, I imagine, for example, that a rather modified risk parity portfolio which used for its global shares allocation an equal mix of low volatility factor and high quality factor passive equity ETFs; with a tilt towards multi asset trend following momentum; and then leveraged 2x, would probably floor a conventional cap weighted global equity tracker on both a total return and on a Sharpe Ratio basis.
But as no fund house offers such a product it has no advocate outside academics and amateur investors. Sadly it’s more about marketing than research in the investment world.
@ #7 Fire & Wide
As a relatively recently FIREd person, I totally share your sentiment regarding active investment and laptop use in FIRE time.
@ #9 Time Like Infinity, The whole reason I am a Mogul is to support this site. Without it, I doubt I would have made the above comment yet if ever. I get more passive the more I read and then… I read something I believe and get a bit active again, it’s an addiction I can’t quit but so long as the harm it does me is manageable, I don’t really want to.
As a born, bred and raised Yorkshireman, paying for anything hurts. I think that this site encourages frugality, which could be its downfall with so much good advice for free, why pay? I did because of the value it gave me for free when I was accruing. I hope that many more people will be in a position because of this site to do the same.
JimJim
population.io told me my last day is 20th October 2049, I’ll put it in my diary. I’m a bit disappointed I won’t get to see net zero.
@Ducknald Don #16 – perhaps we could each celebrate making it past our allotted day as shown on population.io? But I’m not placing too much stock in these bold statistical projections. Back in 1960 a physicist, von Foerster, predicted that if population growth rates continued their hitherto accelerating pattern of increasing acceleration then world population would hit infinity on 13th November 2026. In fact, 1960 turned out to be the year in which the rate of increase for world population growth began to slowdown, as it’s done ever since, in all probability to turn negative in our lifetimes:
https://www.lesswrong.com/posts/bYrF8rXFYwPqnfxTp/1960-the-year-the-singularity-was-cancelled
The are a number of problems with the consensus bond-equity tracker approach (I refuse to call that passive since it’s such an active asset allocation view). To be fair though, 60:40 probably hasn’t looked this good since pre 2008.
The one that I am most diametrically opposed to is that providing the average return (which is what trackers do by construction) is somehow an advantage. I just don’t see this. If everyone else is making 7% and I’m making 7%, then I’ve achieved nothing. Trackers are the equivalent of targeting a B grade or a 2:1. These days, average is simply not good enough in any walk of life.
Another shout out for subscribing. I’m 85% passive, though I obviously make active asset allocation decisions, that’s good enough for me. It’s an insanely good resource well worth supporting.
Following the Mogul piece on BHMG, I pondered a bit and umm-ed and ahh-ed and re-read a couple of times and scratched around the web (not a lot there) and finally went in as 10% of my portfolio’s defensive 35%. Hopefully, it’ll continue doing “something different” to equities when it matters (NOW!) while providing some pretty decent returns. Not sure 10% is enough though. 15%? 🙂
Reduced the Gold from 15% to 10%, got rid of the unhedged Inflation bonds so now am 10% Gold, 10% BHMG, 10% GISG, and 5% Cash. Nice and round numbers. Hopefully something will be doing well when the SHTF. GISG, Gold and cash should see me through to pension age when I’ll have my floor and the equities can provide an upside. I hope.
@Brod #19: re Gold: as a member of the US financial commentariat noted this week: “If I told you 3 years ago that the Money Supply was going to increase 14%, inflation by 18%, and National Debt by 24%, you probably would have guessed that would have been bad for the US Dollar and good for Gold. What actually happened? A 19% increase in the Dollar Index ETF ($UUP) and a 5% decline for the Gold ETF ($GLD)”. Gold just always seems to disappoint. No economic cash flows. Questionable diversification benefits. Doesn’t seem to outperform in either low or high rate regimes. Multi decade long drawdowns. I packed in my small ETF allocation to it several years ago. As with REITs, HY Debt and CBs; I’m not really feeling the love for it now either. At least with CBs etc one can try to apply some sort of fundamental valuation. Just can’t do that for lump of non-industrial metal.
@ZX couldn’t agree with you more that pretty much everything is active to one degree or another – 60/40 included.
My beef is with the people within fund management selling fund picking to the masses when pretty much all available evidence is unambiguously clear that the typical/average small investor’s chances for that approach eventually to beat a cap weighted broad market index of global equities are very poor odds indeed.
@ZX – good to hear your prognosis for 60:40 is positive
Secondly, hope it’s obvious, but if 2:1s aren’t good enough then we’re consigning majority to misery, which as philosophies go isn’t particularly conducive to a happy society . You could reframe and take the position large swathes aren’t even getting 7% so you’re effectively outperforming just by taking the market average. If we’re trying to fund a games console in your spare room you possibly don’t need to shoot the lights out, but concede buying London properties and ivy League MBAs for the whole family is a different ball game altogether
@TLI – many thanks for your comment.
Do let me know what my investing goals are, what role gold plays in my portfolio, my age, my risk tolerance, my general financial status. I think these are important too.
And FWIW, I bought 1829 shares of SGLN in October ’21 at £25.14, sold 931 a year or so later at £29.42 and just recently 768 at £29.85. ii is showing a 19.68% gain on the average price I paid for my holding, though not sure how they work that out. Not too shabby.
I’m with Napoleon.
@Brod #22: it’s a very beautiful quote 🙂 (‘More gold had been mined from the mind of men than the earth itself’); and they’re all excellent points well made, especially on the importance of the role played by gold (or indeed any asset) in a portfolio, and of individual objectives, timeframes and circumstances. I just personally find gold as an investment choice a bit triggering (hence my earlier comment), much like I also do with BTC. More an issue with me perhaps than for the asset. Given the right timeframes, gold certainly can perform, but my aversion to it is, I think, not to its performance in any particular period, but rather to investing in an piece of metal per se.
@Rhino. I said “targeting a B grade or a 2:1”. I didn’t say getting a B or 2:1. The analogy for me is like preparing for an exam and only revising 70% of the syllabus. You’ll probably ensure you did well on that 70% but you’ve given up any chance of the top grade.
Agreed getting 7% may be better than many, since many don’t invest at all. Nonetheless, my perception is that the capitalism we’ve had in my lifetime is one where most of the value accrues to an ever-smaller number of people. The distribution is super-lognormal, so the payout is heavily skewed to the right tail. In that sense I stand by my view that being average doesn’t cut it like it may have done in prior generations.
Therefore, I don’t want to give up possible upside optionality. Not investing in whole markets such as commodities, property, macro, volatility etc or factors such as momentum. Or being forced to take a position only in market-cap weighted terms. I want my duration to match my liabilities, not the issuance program of a government. How did investing in a market-cap weighted Gilt tracker work out in 2022? I like tech stocks since I think they hedge my career risk to a degree, yet I’m not sure my concentration to them at this point in my equity trackers is prudent.
I just don’t want to take a complex problem and oversimplify. Doesn’t mean some CAPM type 60:40 portfolio is bad, just not my preferred option.
@TLI #23
> my aversion to it is, I think, not to its performance in any particular period, but rather to investing in an piece of metal per se.
Hmm, how do you feel about fiat currency, and arguably money as such if you are going to go all philosophical on us? Doesn’t really bear thinking about too hard what you’re exchanging your hours of hard graft at the Man’s coalface for. I’ve just checked what it says on a shiny new one of Mark Carney’s plastic tenners and it tells me that the Bank of England head honcho sez “I promise to pay the bearer on demand the sum of ten pounds” which is deliciously recursive, though content-free.
@ Time like Infinity
“So, it’s not, has never been, and shouldn’t be a binary active v passive question”
I much agree with you. I wonder how many truly passive investors actually exist. Is a decision to hold a 60:40 or 50:50 equities/bonds mix, or whatever mix, not active management? Or for that matter how many truly active investors there really are in the sense of not holding a single tracker fund.
Thanks for the great discussion on various matters — but also of course for the comments in support of subscribing. It’s much appreciated!
And re: TLI’s sleuthing and maths, it’s fair to say that while membership is increasingly under-writing the viability of this site, Internet moguls we are not and are never likely to become haha. In fact we are still behind the minimum number of subscribers I’m targeting, though I’m going to say it’s still fairly early days I suppose. (As long as you all don’t cancel! 😉 )
Hopefully @TA will kick of his de-accumulation strategy for Mavens soon, which should be an interesting read for many Monevator readers. 🙂
@ZX: QQQ/NASDAQ as career risk hedge – Do you mean that in a lower volatility environment QQQ does well, but macro hedge funds struggle (and vice versa in high volatility)?
On current tech valuation situation: since 1972 total NASDAQ returns are similar to SP500 but with more volatility. Outperforms in bull markets, and trails in bear markets. If SP500 is expensive, then perhaps so too is the NASDAQ, but I wouldn’t say that the NASDAQ is all that much more pricey than the SP500. Lots of tech companies making lots of money. And it’s within the NASDAQ 100 that disruptive businesses are to be found.
@TLI. I have an underlying long-term asset allocation principle of being overweight stuff that will inflate my liabilities and/or reduce my earning potential and underweight stuff that reduces my liabilities or increases my earning potential. It’s sort of a proxy hedge.
Originally, I was at a bank and agreed with the likes of Jamie Dimon that the real competition was the tech sector. Essentially, tech innovation, whether algos/neural nets/LLM or the rise of cheap trackers on retail platforms would eventually put finance professionals like me out of work or at least crimp compensation.
To be honest, it hasn’t really panned out that way. If anything, especially in recent years, it seems that tech has made markets less efficient and easier to make money in. The tech is basically still “dumb” often as a feature, not a bug. Clearly at some point that will change but it’s taking a lot longer than I feared it might.
Nonetheless, I’ve stayed overweight tech (in what would be considered an underweight equity allocation). Partially since at some point, I think it will make me (and many others in white collar jobs) obsolete. I been buying Nvidia GPUs for home use for years and I’m very aware of their progression. Partially, for the reasons you state, that tech tends to get clobbered when macro does well and vice versa (2022 being a textbook example).
@TLI:
Assuming I understand @ZX (#29) comments correctly, you may find this slide show of some interest: http://advisor.morningstar.com/Enterprise/VTC/NoPortfolio.pdf
Many thanks @ZX and @Al Cam.
– Is the exploitable ‘dumbness’ of financial tech down to replacing hard to predict (or predictably unpredictable) sub-optimal humans with easy to predict (predictably predictable) optimised automata e.g. enabling hedge fund ‘front running’ of institutional automated ETF rebalancing?
– Even if AGI/ASI does emerge (my guess is that this is quite unlikely in the near to mid term, but what do I know?) then who will watch the Watchmen? Humans will still presumably be needed to programme, supervise, direct and interact with the machines. Spreadsheets didn’t get rid of accountants, nor did calculators remove the demand for mathematicians.
– Love the Morningstar slide presentation. In terms of my own personal human capital, I felt like an equity (maybe an EM small cap) at the start of my career, but this far in now (well into the third decade) I’m definitely into junk bond territory, whilst still aspiring to rerating and being turned into a ultra short dated ILG with no term/rate, inflation or default risk.
BTW I came across this 2017 research paper (“Stock market charts you never saw”) on SSRN confirming @ZX’s correct identification (in the previous weekend reading thread, IIRC) of my overly “centrist” view of equities:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3050736
The charts themselves are at pages 43 to 54.
@TLI (#31):
The MS slide pack is a bit of a goody; even though there are lots of generalisations and simplifying (ahem..) assumptions!
The revision notes in the SSRN paper you reference (inc. the updated paper) are IMO worth following. Having said that, ZX’s “centrist” comment (see https://monevator.com/weekend-reading-you-can-bank-on-this/#comment-1710027) seems reasonable to me.
A recent SPIVA scorecard showed the asymmetric risks with active investing. 95% of funds failed to beat the S&P 500 over 20 years. Over a lifetime I don’t know, maybe 99%? So over a lifetime of investment, you might be in the top 1% of buy and hold investors if you simply buy the index. Most retail investors do not even manage to get the comparatively mediocre returns of their active funds because of their own inopportune trading.
So why don’t people just by ETFs? Some people are completely ignorant of the risks they are taking with active funds and get bamboozled by the finance industry. Even if they have heard of ETFs, they get convinced that ETFs produce average returns instead of way above average in the long term. Most people do not consider their investment skills to be average, so why would they settle for average returns?
For those in the know I think there are a number of reasons why they don’t buy ETFs, but I think it mainly boils down to the fact that passive investing is really hard. Simple in theory, but human nature makes it very hard to implement. “I know passive is best in the long term, but what about the recent returns of ABC?”, “The recent rise in the S&P is clearly unsustainable, I need to take some risk off the table”, “Value shares look really cheap in historical terms”, “Look at Woodford’s fantastic returns”, etc.
ps, I have not logged in for some time as I have been reading the emails, but cannot seem to login now.
Edit, sorry ignore that, it appears that I am logged in!
@Naeclue: active fund management is basically about Assets Under Management and not returns. AUM determines fees, at least much more so than performance. The biggest funds are those with the largest PR spend and the best known names/brands. Until very recently, when Vanguard began low level advertising in the UK, there was no one – outside of this site – beating the drum for indexing. The fawning treatment of active fund managers in the financial pages and by platforms meant that, even though the evidence clearly showed indexing was overwhelmingly more likely to produce better results for the average investor, it was active funds holding the commanding heights of the capital allocation landscape.
IMO there are actually a handful of non-cap weighted broad market index tracker approaches which are potentially quite good candidates for a superior solution, whether in terms of risk adjusted and/or total returns. However, none involves any ‘conventional’ actively managed funds, and none of them are made either easy to access or easy to implement. Moreover, each typically may involve more difficulty, complications and uncertainties than the potential reductions in risk (quantifiable variance) and/or possibilities to increase returns arguably justify.
@All: nugget from the NYT back in 2014 shows the essential methodological bankruptcy of active fund management:
– S&P Dow Jones looked at 2,862 US mutual funds operating for at least 12 mths as of March 2010. Funds all broad, actively managed, non leveraged, domestic stock funds.
– Selected 25% with best performance over the 12 mths through March 2010.
– Then asked how many of those funds in the top quarter for the original 12 mth period actually remained in top quarter for the four succeeding 12 mth periods through March 2014.
– Answer was just 0.07 percent of initial 2,862 funds managed to achieve a top-quartile performance for those five successive years. That works out to just two funds. 99.93% percent, or 2,860 of the 2,862 funds, failed this test.