Investing

Active VS Passive investing- WHICH IS BETTER for 20 years ?

  • Last Updated:
  • Mar 29th, 2019 3:24 pm

Poll: Active VS Passive Investing - Which is better for 20 year period?

  • Total votes: 59. You have voted on this poll.
ACTIVE (trading daily/weekly)
 
5
8%
PASSIVE (buy and hold)
 
54
92%

This poll will close on Jun 18th, 2019 9:23 am.

[OP]
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Sep 6, 2018
195 posts
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Active VS Passive investing- WHICH IS BETTER for 20 years ?

Which will be better for your retirement ?

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29 replies
Deal Fanatic
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Dec 14, 2010
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For me, it's both. They serve different purposes, buy and hold has time on my side. But short term trading allows me to monetize earlier. Also, buy and hold can be both passive (indexing, couch potato) or active (picking growth stocks, dividend stocks, etc).


Rod
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Oct 21, 2014
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I voted passive. Watch your companies, collect your dividends and enjoy.Smiling Face With Open Mouth
[OP]
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Sep 6, 2018
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So far only 2 votes for Active trading... and 12 votes for Passive (buy and hold)

I didnt know Passive investing such as indexing was this popular...
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May 11, 2014
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We need to move away from looking at strategies as better vs worse. The problem with defining investments as such is that strategies are relevent based on the individual investor. I am mostly an active investor, it is better for me, I have (so far) gotten better returns than an index/passive strategy, but I also incorporate a portion of my investments with funds I dont look at which you can call passive. The thing is while i have done well, I don't expect people to invest the same amount of time and research as well as take as much risk that I do. Someone with lower risk tolerance or subscribes to a steady, safer, clear-cut approach may prefer and do better with passive approach. Regardless which you take, as long as you reach your financial objectives, it doesn't matter which way you go as long as it is appropriate for you.

So for this reason, I refuse to answer this poll. There is no "better strategy." An investment is better when it is made as the investor is fully aware of why and how they are invested.

PS curious, what is your obsession with polls?
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[OP]
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Sep 6, 2018
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So for this reason, I refuse to answer this poll. There is no "better strategy." An investment is better when it is made as the investor is fully aware of why and how they are invested.
I see..
xgbsSS wrote:
Mar 25th, 2019 12:16 pm
PS curious, what is your obsession with polls?
Its a quick way to get peoples opinion....

I wanted to do one on this topic because these "couch potato" strategies have become very popular... but how can a "Buy and Hold" couch potato guy sit calm when the market goes down 20 or 30 ...even 40 percent..

They will say, "markets always go up long term..." ..... "dont worry, it will come back up..."
BUT what if the market doesnt recover in ones lifetime ?
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Nov 9, 2013
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BadSitcoms wrote:
Mar 25th, 2019 12:44 pm

I wanted to do one on this topic because these "couch potato" strategies have become very popular... but how can a "Buy and Hold" couch potato guy sit calm when the market goes down 20 or 30 ...even 40 percent..

They will say, "markets always go up long term..." ..... "dont worry, it will come back up..."
BUT what if the market doesnt recover in ones lifetime ?
Doing something generally hurts returns. Doing nothing is most often the best course of action, which is why active strategies generally underperform.

One needs to have faith in the long term returns of equities; as it's only in hind sight that you will definitively know. There are periods of time (i.e. decades) where nothing happens, and then other periods of time where everything happens. Generally, the periods of time that contribute to the overall positive return are few and far between and the only way to capture these periods of time are to be invested - it's not a slow and steady march upwards; it's lumpy.

In the long term it's more important that you get out of your own way (i.e. avoid doing things like fear selling) rather than by finding the "right" strategy. If you have trouble buying into the power of equities over the long term consider reading Stocks for the Long Run by Jeremy Siegel.

If you are skeptical after this, then you are still likely to make bad behavioural decisions and the best advice would probably be to invest in a strategy that you have faith in and can mentally buy into (i.e. real estate) - all in an effort again for you to get out of your own way.
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BadSitcoms wrote:
Mar 25th, 2019 12:44 pm
I see..



Its a quick way to get peoples opinion....

I wanted to do one on this topic because these "couch potato" strategies have become very popular... but how can a "Buy and Hold" couch potato guy sit calm when the market goes down 20 or 30 ...even 40 percent..

They will say, "markets always go up long term..." ..... "dont worry, it will come back up..."
BUT what if the market doesnt recover in ones lifetime ?
The problem with framing a question in a poll is that you are getting superficial results. It takes no effort to answer the question. People like @rodbarc who has the thoughtfulness and deep knowledge to give you a well thoughtout response can't effectively answer your question because it isn't framed correctly.

If markets don't ever recover, there is a bigger issue and a passive or active investor will both be in trouble. An investment strategy alone won't save you from the collapse of modern capital markets in the case things never recover. I can never guarantee what I do will 100% work, but with a well defined strategy and plan, I shouldn't have to worry whether my money will be there. The question you pose is a situation where no one including those who don't invest will be in trouble.
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BadSitcoms wrote:
Mar 25th, 2019 12:44 pm


I wanted to do one on this topic because these "couch potato" strategies have become very popular... but how can a "Buy and Hold" couch potato guy sit calm when the market goes down 20 or 30 ...even 40 percent..
This again will depend. For instance, I like to buy undervalued companies. Companies that continue to grow earning 10-20% a year, yet the stock is flat or down 20-30% happens quite frequently. Even upon release of good earnings, you can still see stocks crash. Take a look at graphs of AC.TO, BAD.TO or EIF.TO, some of my largest winners, you can see 20,30,40% drops that might make one panic over the last 2-5 years. For me as an active investor, I know these company's fundamentals were strong and improving. To me, the drops don't make sense so rather I took them as opportunities to invest further at a discount. A passive investor can also assume the economy as a whole isn't ruined beyond belief. Regardless of what happens, companies still need to exist and provide goods and services to the populace This earns income and therefore more or less an economy of some sort still exists. In a country like Canada where we have a growing population, all the more reason to think the economy will more or less expand in some capacity.
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Mar 16, 2018
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BadSitcoms wrote:
Mar 25th, 2019 12:44 pm
BUT what if the market doesnt recover in ones lifetime ?
Would this be someone that failed to invest in bonds and other fixed income products as they approach retirement?
If investment grade bonds were to truly fail, there's a pretty good chance you're living in an apocalyptic post-monetary society and all investments are worthless anyways.
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BadSitcoms wrote:
Mar 25th, 2019 12:44 pm
I wanted to do one on this topic because these "couch potato" strategies have become very popular... but how can a "Buy and Hold" couch potato guy sit calm when the market goes down 20 or 30 ...even 40 percent..

They will say, "markets always go up long term..." ..... "dont worry, it will come back up..."
BUT what if the market doesnt recover in ones lifetime ?
Reading the way you explained above, I think your question has nothing to do with the strategy employed (active / passive) and everything to do regarding the temperament to invest (or trade).

The natural tendency is for stocks to go up over the long term, based on the interplay of rising population, rising education, productivity and living standards all of which translate to better economic activity and corporate profits and all that is good on the whole for ownership of productive assets – which is what stocks are.

Here is how I'm 100% convinced that the market will always recover in one's lifetime: what is the stock market? It's a mix of stocks sorted by market cap. Each stock represents a business. Stock price fluctuates a lot, but the true value of a business doesn't. Stock price, because it's a representation of what the business is worth, tend to follow earnings and / or cash flow (depends on the industry); so to say that the market might not recover in one's lifetime, is the same that saying that the companies profitability might not recover in one's lifetime. And although many companies won't recover, and although I'm sure that many of SP500 companies today won't exist (or be in the SP500 index) 10 or 20 years from now, other companies will grow and be replaced in that index. The economy and the world will continue to prosper (a few bumps and recessions from time to time, but it won't be on a spiral downward with zero chance of recovery like Venezuela or Japan because North America's economy works on a different dynamic, with companies that fixes problems and get things done, drive growth, and are helped by the government when needs to).

An investor always believe in a better tomorrow, in the ability of companies reacting, adapting and grow profits again if they had bad results of if the economy is poor. So any seasoned investor take the periods of fear as opportunities, for 2 reasons: Many companies will be trading cheaper than they should at those time, and when they are purchased undervalued, the return on one's portfolio is higher than the actual growth of that business; and second, because investors know that companies with a solid tracking record of overcoming challenges in the past have a solid team that are likely to overcome future challenges - that's why executives are so highly paid, these are bright people that know how to lead and have the company to produce results.

So to challenge if the market will ever recover in one's lifetime, then what piece is driving skepticism? That stocks don't follow earnings and cash flow? Or that companies will no longer be profitable?

A recession didn't even hit us yet, and there are lot of fear already. I can guarantee that as soon as the stock market drops another 20% or 30%, or that a recession is confirmed, the fear will be much higher. A lot of poor financial decisions will be made, including selling assets when they are trading below their intrinsic value. A lot of people "will take their losses and wait" or "take the losses and be out forever" during the time that will be the most opportunistic to buy. It happened in 2008, in 2001, and if you keep looking at history, it happens at every recession, because most people don't understand that investing is about discipline and temperament, not about a strategy or financial knowledge or understanding the economy. If someone sees their couch potato portfolio drop a lot and they panic, that's not the couch potato's strategy fault, that's their own fault for associating volatility with the fear that their portfolio will go to zero and never come back.

Buffett said it best in this 2009 class, right after the huge 2008 crash, at the Buffett & Gates at Columbia Business School:

" In 1954, the Dow dividends were up 50%. Now if you look at 1954, we were in a recession a good bit of that time. The recession started in July of '53. Unemployment peaked in September of '54. So until November of '54 you hadn't seen an uptick in the employment figure. And the unemployment figure more than doubled during that period. It was the best year there was for the market. So it's a terrible mistake to look at what's going on in the economy today and then decide whether to buy or sell stocks based on it. You should decide whether to buy or sell stocks based on how much you're getting for your money, long-term value you're getting for your money at any given time. And next week doesn't make any difference because next week, next week is going to be a week further away. And the important thing is to have the right long-term outlook, evaluate the businesses you are buying. And then a terrible market or a terrible economy is your friend. I don't care, in making a purchase of the Burlington Northern, I don't care whether next week, or next month or even next year there is a big revival in car loadings or any of that sort of thing. A period like this gives me a chance to do things. It's silly to wait. If you wait until you see the robin, spring will be over."


Rod
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Investing strategy based on dividend growth

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It's a fact, supported by data, that 95% of all professional money managers do not beat the index over 20 years (individual investors as a whole fare even worse). So, there's a 5% chance an active investing will beat a passive. You can't argue with physics. Rodbarc might but there is a very good chance he will not after putting all the work he does into being an active investor.
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eonibm wrote:
Mar 26th, 2019 10:40 am
It's a fact, supported by data, that 95% of all professional money managers do not beat the index over 20 years (individual investors as a whole fare even worse). So, there's a 5% chance an active investing will beat a passive.
True, but comparing active management with an index benchmark is wrong because you aren't considering risk-adjusted returns. The active managers are attempting to manage drawdowns whereas an index fund doesn't.

Most mutual fund managers are typically required to be fully invested (with prospectuses defining the percentage range that constitutes fully invested).

Therefore . . .

Suppose the market reaches excessive heights. As that happens, the public gets more bullish and invests more money into mutual funds. The manager would probably like to hold onto the cash and await a decent buying opportunity. He can’t. Even if he is pretty sure the market is at a major top, he has no choice, he has to commit funds. And even if he gets no new funds, he can’t take profits and build cash from what he was holding (subject to very very tight limitations); he has to stay fully invested.

Conversely, after the market gets hammered and stocks are screaming buys, the manager must sell in order to raise cash for shareholder redemptions, which are very heavy at market bottoms.

It doesn’t matter what one thinks of market timing. The manager has no choice but to be an active buyer at tops, in order to put new money to work, and an active seller at bottoms, in order to meet redemptions. The very nature of an open end fund, where the portfolio grows or shrinks as the public contributes or withdraws funds, combined with the reality that the public is always emotional, and therefore, always wrong, tends to put open-end managers behind the 8-ball right from the start. So it’s really wrong to compare them to the SP 500 or any index. It would be more appropriate to create a hypothetical open-end SP 500 index fund and impose fund flow buying and selling that represent industry-wide fund flows.
eonibm wrote: You can't argue with physics. Rodbarc might but there is a very good chance he will not after putting all the work he does into being an active investor.
I'm ok with that, I'm an active investor because the index doesn't meet my goals, so beating the index won't help me. Not every individual investor have the same investment goals, or needs. Some investors are concerned with beating the market, others are concerned with maximum safety over the highest return, and others are concerned with maximizing their income and the growth thereof.

Dividend growth investment allows me to build a portfolio that will generate a perpetual growing stream of income in any condition, where I can remain 100% invested during retirement too. I haven't found an easier way / less work involved to do so with an ETF while meeting my goals.

Instead of comparing each strategy (which I find flawed because they are not meant to be compared), I rather evaluate the goals, risks and timeframe of an individual and their specific situation to find out the best strategy that is suitable for him/her. The statistics shouldn't be a deciding factor on that, because what the majority does not necessarily is the right answer for everyone (the same way that a particular strategy won't be useful to everyone).

Regardless of the strategy employed, sticking to the plan (whatever the plan) is the hardest thing to do, and the main reason to why so many investors do poorly.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:

Investing strategy based on dividend growth

Trading strategy based on Graham principles.
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eonibm wrote:
Mar 26th, 2019 10:40 am
It's a fact, supported by data, that 95% of all professional money managers do not beat the index over 20 years (individual investors as a whole fare even worse). So, there's a 5% chance an active investing will beat a passive. You can't argue with physics. Rodbarc might but there is a very good chance he will not after putting all the work he does into being an active investor.
You are misinterpreting the study . The study said active funds after taking into accounts fees underperformed 95% of the time. Because many different investors buy and sell their units at any time, fees will always pile on. An individual investor who may buy and sell stock as they see fit doesn;'t have the issue of these fees piling on.

You cannot extrapolate the study to mean only 5% of individual stock pickers can beat the index. That is simply not what the S&P study found. I can post the link to the paper if you'd like.
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xgbsSS wrote:
Mar 26th, 2019 4:45 pm
You are misinterpreting the study . The study said active funds after taking into accounts fees underperformed 95% of the time. Because many different investors buy and sell their units at any time, fees will always pile on. An individual investor who may buy and sell stock as they see fit doesn;'t have the issue of these fees piling on.

You cannot extrapolate the study to mean only 5% of individual stock pickers can beat the index. That is simply not what the S&P study found. I can post the link to the paper if you'd like.
Just out of interest, could you post the link to the paper? TIA.

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