mixing active and passive investing

[eryx]

I haven't been able to find threads on this topic.

Do people go all-passive for their investing? (i.e., index funds only, as opposed to active funds & individual stock/bond picking). Would it be considered diversification to utilize both indexing and active management? i.e. hedging the bet against which is the "best" by utilizing both? And then to what extent should each be used (80/20 for example).

Here's an article about the massive shift out of active funds and into passive funds
http://www.investmentnews.com/articl.../REG/301229986


Also it occurs to me that selecting asset allocation, choosing when to deposit money, and when to shift money around between accounts is active investing even if all the accounts are index funds.

Maybe I'm thinking about things the wrong way?

[pb4uski]

I think of active investing as stock picking - an active fund manager has to pick what specific stocks or bonds their fund invests in. A passive fund manager just buys stocks or bonds in the index broadly in proportion to the index.

I think of diversification as between asset classes and would not view a mix of active and passive funds as diversification.

While I would go totally the passive route, many people have a mix of active and passive funds.

[Alan]

Until we ER'ed we had no option other than to mix active and index funds to meet our desired asset allocation since our 401k fund options were limited to mostly active funds.

Now we're ER'ed, and have rolled our funds over to IRA's, we are mostly in indexed funds, except Wellesley, which is actively managed.

[inquisitive]

I wouldn't consider a mix of actively managed funds and index funds "diversification." To diversify, you want different kinds of investments. So if your index fund has American stocks and the actively managed fund does as well, then there isn't much diversification if the US market goes down. If you got an actively managed foreign mutual fund, then this would be diversification, but not because it is actively managed, but because the underlying investments are different.

There is am ample amount of data that a miniscule portion of actively managed funds outperform an index fund.

Also keep in mind what happened in 2008. Virtually all investments lost money, despite individuals' so called diversified portfolios. I did see an article that claimed that diversification would have blunted the fall in the market, but that most individuals had too much in stocks and not enough in other kinds of investments.

[inquisitive]

Quote:

Originally Posted by eryx Also it occurs to me that selecting asset allocation, choosing when to deposit money, and when to shift money around between accounts is active investing even if all the accounts are index funds. Maybe I'm thinking about things the wrong way?

You are thinking about this the wrong way. Active investing refers to choosing individual stocks, as someone else mentioned. Asset allocation has nothing to do with active investing, nor does choosing when to deposit money. Now regarding shifting money between accounts (I'm assuming you mean types of investments) I would consider active investing, because the idea is that you presumably think you can outperform what your current portfolio is doing by using a timing based mechanism.

[LOL!]

I think rather than "active" versus "passive", one can just stick with ETFs and mutual funds that have very low expense ratios in the asset class that you want to be invested in. Most of the time, that will be a passive index fund, but Vanguard and DFA shops have low-expense ratio actively-managed funds. OK, they are sedately actively managed such as the TIPS fund, the GNMA fund, the Wellesley fund, etc.

At this point in time, we have no actively-managed stock funds.

[Alan]

Quote:

Originally Posted by inquisitive I wouldn't consider a mix of actively managed funds and index funds "diversification." To diversify, you want different kinds of investments. So if your index fund has American stocks and the actively managed fund does as well, then there isn't much diversification if the US market goes down. If you got an actively managed foreign mutual fund, then this would be diversification, but not because it is actively managed, but because the underlying investments are different. There is am ample amount of data that a miniscule portion of actively managed funds outperform an index fund. Also keep in mind what happened in 2008. Virtually all investments lost money, despite individuals' so called diversified portfolios. I did see an article that claimed that diversification would have blunted the fall in the market, but that most individuals had too much in stocks and not enough in other kinds of investments.

I agree completely, but I didn't think OP was talking about diversification, he was talking about achieving your goals, (of AA and diversification), and whether folks did this entirely with index funds or a mixture.

[justplainbll]

I consider the 20% of my portfolio invested in 55 mutual funds to be a passive investment.

[Animorph]

I'm happy to use actively-managed mutual funds that I think will be superior long-term performers. If nothing stands out, I'm happy to use index funds instead. I rebalance using allocation percentage triggers, which could look a little active but is just near-standard rebalancing. I become active when my equity portfolio exceeds my retirement projections. When that happens I sell the excess equities for cash. And if that cash is still around when the market is over 20% down from its peak I start to buy equities with a portion of that cash. Those conditions should ensure that I buy low and sell high. I am retired, so I'll eventually get around to spending the cash if it doesn't get reinvested.

I've certainly seen plenty of recommendations to index most of the portfolio and use 5% or so to "play the market" for those that have to play. Certainly you're free to do whatever you like, but limiting your active participation will limit the damage you can do to your portfolio. Morningstar has plenty of stats that show investers in aggregate should keep their hands off their portfolios.

[haha]

Quote:

Originally Posted by justplainbll I consider the 20% of my portfolio invested in 55 mutual funds to be a passive investment.

Think you have enough diversification?

[Onward]

If you "get" passive investing, then you see active investing as delusional and wasteful. If you reject passive investing, then you see passive investing as mediocre. I don't really understand mixing the two, unless someone just can't make up his/her mind?

Or maybe use passive in liquid markets and active in less liquid markets, where there's a chance of some inefficiency?

[easysurfer]

Quote:

Originally Posted by justplainbll I consider the 20% of my portfolio invested in 55 mutual funds to be a passive investment.

Since you have 55 mutual funds, I think regardless of what they are invested in, that's an active occupation

[inquisitive]

Quote:

Originally Posted by Onward If you "get" passive investing, then you see active investing as delusional and wasteful. If you reject passive investing, then you see passive investing as mediocre. I don't really understand mixing the two, unless someone just can't make up his/her mind?

Agree completely.

[Major Tom]

Quote:

Originally Posted by Onward If you "get" passive investing, then you see active investing as delusional and wasteful. If you reject passive investing, then you see passive investing as mediocre. I don't really understand mixing the two,

Agreed, if you're viewing them as ideologies as opposed to merely differing approaches.

[traineeinvestor]

Quote:

Originally Posted by Onward If you "get" passive investing, then you see active investing as delusional and wasteful. If you reject passive investing, then you see passive investing as mediocre. I don't really understand mixing the two, unless someone just can't make up his/her mind?

IIRC, even the Bogleheads allow for a small percentage allocation to active investment strategies.

Its also worth bearing in mind that not everyone has access to the ultra low cost index funds that are available in the US. I've seen some "low cost" index funds with MERs above 1% which makes me wonder at what point it pays to ditch the passive approach and just buy equities directly.

( investing directly into US listed ETFs comes with 30% withholding taxes on distributions and the future FATCA related risk of having 30% of any sales proceeds withheld, which more or less takes that option off the table)

[justplainbll]

Quote:

Originally Posted by easysurfer Since you have 55 mutual funds, I think regardless of what they are invested in, that's an active occupation

Booking dividend reinvestments can be a pain and comparing the performance of funds like ACITX, FINPX, PRRDX, and VIPSX can be painful. On the other hand it seems that MLPFS' discouraging investment in ACITX has been serendipitous.

[justplainbll]

Quote:

Originally Posted by haha Think you have enough diversification?

Yes; in addition, having positions in some 150+ different individual equities does help ensure hearing some news about a few of them at least weekly. Not even a chicken puts all its eggs in one basket.

[REWahoo]

Quote:

Originally Posted by justplainbll Not even a chicken puts all its eggs in one basket.

Keeping track of eggs spread to hundreds of baskets does provide the chicken with a full-time job busywork hobby. All us retirees have to figure out what to do all day, eh?

[justplainbll]

Quote:

Originally Posted by REWahoo Keeping track of eggs spread to hundreds of baskets does provide the chicken with a full-time job busywork hobby. All us retirees have to figure out what to do all day, eh?

I average about 4 hours per day. The design of my antiquated self-written software constrains the number of issues in my active portfolio to 209.

[MBAustin]

We have investments in a few actively managed funds that we started putting money into a long time ago (e.g. before index funds were widely available). They have performed well so I see no particular reason to move out of them. All new investments are with Vanguard, primarily in index funds.