Passive is the New Aggressive (Part 5)

Key Points

  • The fee differential between active and passive mutual funds may not appear to be significant at first sight.
  • However, over long periods, the impact of higher fees associated with active investing through mutual funds can be considerable, as compared to passive alternatives.
  • As such, over an investment lifetime of 45 years, excessive fees could wipe out a large percentage of your potential wealth.
  • Therefore, going with a passive approach has the potential to mitigate this particular concern.

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Passive is the New Aggressive (Part 4)

Key Points

  • Higher fees tend to correlate with worse investment performance, as suggested by research from Vanguard based upon the historical analysis of active and passive large-cap mutual funds.
  • Research suggests that the lower the fees, the less likely that a fund will underperform its benchmark (which is good for the investor).
  • Sound investing comes down to being able to differentiate between what you can control and what you can’t, and then doing your best to focus on the former while still maintaining a solid understanding the risks associated with the latter.
  • Given that you can control how much you pay in fees, but not whether a fund will outperform, a passive approach has strong merit over an active one.

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Passive is the New Aggressive (Part 3)

Key Points

  • There may be strong psychological reasons why financial firms can command such high fees.
  • Ultimately, these high fees can lead to the systematic transfer of wealth away from investors’ pockets.
  • The Efficient Market Hypothesis suggests that actively invested mutual funds face an impossible challenge in outperforming their passively invested counterparts.
  • Nevertheless, the fees for actively managed funds are much higher than those of passively managed funds.

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Passive is the New Aggressive (Part 1)

Key Points

  • According to theory, on a forward-looking basis, stocks are priced such that each stock should offer its investors with the same risk-adjusted return as any other stock, irrespective of past performance.
  • Based upon this line of reasoning, outperforming the market is exceedingly challenging.
  • Given this, passive investing aims to keep investment choices to a minimum with the goal of selecting an appropriate benchmark and aligning investments as closely as possible to said benchmark, with minimal fees and cost.
  • Alternatively, active investing involves making purposeful decisions regarding the selection and timing of investments, in an effort to nevertheless outperform the market.

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Why invest in one thing over another? (Part 4)

Key Points

  • The Efficient Market Hypothesis has plenty of criticisms that are not only important to understand, but also have strong validity, and therefore should not be dismissed.
  • Boom and bust cycles provide strong evidence of pervasive market irrationality; nevertheless, this is not the same as knowing when irrationally exists and knowing when it will go away.
  • It is not enough to be able to spot irrationality because, “the markets can stay irrational longer than you can stay solvent”.
  • Rational and irrational investors may be unduly influenced by behavioral biases leading to the sustained, yet unpredictable mispricings of securities.

Continue reading “Why invest in one thing over another? (Part 4)”