Bloomberg View: Active vs Passive Investing
October 12, 2017
Yesterday on Bloomberg View, contributors Nir Kaissar (a portfolio manager located in Washington, DC), and Barry Ritholtz (host of Masters in Business podcast and co-founder and CEO of Ritholtz Wealth Management), debated the state of the investor market, looking at investor trends and the merits of active vs passive management. Their debate supports the idea that investor behavior plays a large role in the influence that active managers have in the industry and the recent trend towards passive management.
“Now we are at the most important part of this debate! I would rewrite your comment as: Investors deserve most of the blame for poor results, due to not having a plan they can or want to stick with, chasing the hot hand, being emotional in their investments, and lastly, their lack of discipline in following their own plans.” – Barry Ritholtz
While the argument over what is a more sound strategy; active or passive investing, has long been waged, the trends we’re seeing today are unique in that the investors are demonstrating new perceptions and needs.
We believe that the new generations of investors seek a low-cost approach with more involvement than your traditional passive fund, but not incurring the full risk of investing on their own. From this perspective, it’s easy to see the value of social investing.
It’s fair to say that at Voleo we’re advocates for active investing, though we condone doing so as part of a team to leverage the group’s knowledge and experience. Decentralizing decision making from one person to a group of interested parties helps to mitigate risk; each person contributes capital to the shared portfolio, and creates a social experience, with team members democratically voting on proposed trades with buy or sell orders only confirmed on consensus. In fact, an entire Voleo investment club splits a single trade fee. At our average of 8 members per club (you can have up to 100 members), it works out to only $1.50 each per trade.
While we do encourage including passive funds (index funds), in your portfolio as a means of increased diversification, we also strongly encourage active engagement with one’s own finances and investments. There is no greater advocate for your own success than you, and understanding the mechanics of the stock market has proven to be an enormously worthwhile skill set. In disagreement with the money management industry’s angle; the stock market is complicated, we make it easy for you, we believe that the stock market is for everybody, but like with anything, becoming comfortable takes time.
One of the major threads throughout their discourse is cost. Traditionally, active management costs far more based on the performance and management fees that a fund manager takes. This is an outdated model that hasn’t proven to benefit the investor. Democratizing investing by making it cost-friendly allows for a wider spread of financial literacy and engagement.
“First, let’s define active and passive. To me, passive investing means buying a broad cross section of the market and weighting the components based on their market capitalizations. Everything else is active.” – Nir Kassair
Read Nir and Barry’s op-ed here.