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, 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 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:

• Who is passive? – Preston McSwain
• Q&As on passive investing – Part 1 & Part 2 by Cullen Roche [He was early on this]
• Indexing sheds passive clothing – ETF.com
• The past, present, and future of ETFs [Excellent podcast, the short tax snippet is US-centric] – Invest Like The Best

These posts may confuse new investors, who I feel should learn the basic terminology 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

[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

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

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

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

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

Products and services

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

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

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

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

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

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

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

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

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

Comment and opinion

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

A few snappy thoughts about money – Morgan Housel

Proof negative – Above the Market

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

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

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

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

Five famous market gaffes – The Value Perspective

Twists and turns in the Tesla story – Musings on Markets

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

Brexit

Brexiteers calling Government’s own impact report ‘Project Fear on speed’ – Guardian

Brexit vote revisited – DIY Investor UK

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

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

Kindle book bargains

Rivers of London by Ben Aaronovitch – £0.99 on Kindle

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

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

Off our beat

You see what you want to see – Of Dollars and Data

The secret to tackling workplace nerves – The Pool

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

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

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

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

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

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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”.

from Monevator http://monevator.com/does-the-passive-label-put-people-off-index-funds/