mixing active and passive investing

[Finance Dave]

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/article/20120122/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?

I think it's what the movement of funds is based on that determines whether it's active or passive. If it's based on appreciation of a particular asset class, then it's rebalancing and not active investing. If it's based on a hot stock tip, then it's active.

I am a passive investor. I can see that in rehirement, I may take 10% of my portfolio and actively manage it...but that's about it.

 

[Finance Dave]

Here is something.

New Evidence in Support of of Active Fund Management: Will it End the Active / Passive Debate? « Portfolio Investing Blog: Portfolioist

Thanks for the link. IMO the research is flawed:

1) One of the supporters owns a fund that he finds beats the averages? Really?

2) They don't take into account the time taken to do the work, which they admit is significant. Could you, instead of sitting on your fleshy rear, get a job making $$$ during those hours, invest it in a passive fund, and come out ahead of the active fund?

3) The article even questions whether most people have the knowledge and diligence to do this. There are professionals out there who spend 50 hours/week trying to eke out 1/8% extra return from their portfolios, who cannot beat the index most years, and they can't figure this out?

Sorry, I'm not a believer. I believe in semi-strong market efficiency...and related to this is the concept that, in the market, **** happens.

 

[Animorph]

Here's my favorite Morningstar article about active vs. passive.

Morningstar Free Smartpage | News

"Voting With Their Feet
That sounds great on paper, but what have investors done? Turns out, they know quality when they see it. About 80% of the total assets in active equity funds are held in funds that have beaten the market over the past 15 years. For sure, there's been performance-chasing, but the flow data indicates that investors have done a decent job of avoiding the losers and buying the winners, perhaps switching from one winner to another."

Not very rigorous, but one of the few to tackle the question of how to find a better than average fund.

 

[WilliamG]

Don't index bonds at all. Split stock allocation 50/50 between indices and Wellington/Wellesley; i.e., 25% Total International & Total Stock Market, 25% Wellington and 25% Wellesley. Other 25% is cash, bonds and short bond fund.

 

[M Paquette]

Here's my favorite Morningstar article about active vs. passive.

Morningstar Free Smartpage | News

"Voting With Their Feet
That sounds great on paper, but what have investors done? Turns out, they know quality when they see it. About 80% of the total assets in active equity funds are held in funds that have beaten the market over the past 15 years. For sure, there's been performance-chasing, but the flow data indicates that investors have done a decent job of avoiding the losers and buying the winners, perhaps switching from one winner to another."

I'd be very interested in seeing the back tested results of such a "follow the pack" active fund investing program, compared to investing in index funds in a taxable portfolio. I do have a sneaking suspicion as to what the results will be over a few decades...

 

[dizzy]

About 80% of the total assets in active equity funds are held in funds that have beaten the market over the past 15 years.

Isn't this just survivor bias, since the successful funds will naturally compound to higher balances? A statistic like this measures money gained, not money lost over 15 years.

Here's some 2009 research on mutual fund distribution:

False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas by Laurent Barras, Olivier Scaillet, Russell Wermers :: SSRN

They find that only .6% of the funds sampled had truly better than market performance net expenses. 75.4% were neutral (net expenses), and 24% were under performers. So, if you're comfortable consistently picking the .6% -- more power to you!

They also find that if you look at performance pre-expenses, 9.6% of the managers can beat the market (vs. .6% post expenses), leading them to conclude:

Thus, almost all outperforming funds appear to capture (or waste through operational inefficiencies) the entire surplus created by their portfolio managers.

 

[Finance Dave]

Isn't this just survivor bias, since the successful funds will naturally compound to higher balances? A statistic like this measures money gained, not money lost over 15 years.

I kinda wondered something similar...as they say "over the last 15 years", not EACH of the last 15 years. If you take an average fund, then half of all funds beat it over the last 15 years...by definition.

 

[dizzy]

They also find that if you look at performance pre-expenses, 9.6% of the managers can beat the market (vs. .6% post expenses), leading them to conclude:

This also leads to the conclusion that if you are a skilled active investor, you should manage your own portfolio of stocks, rather than trying to "pick" mutual funds. Makes sense to me -- "actively" managing a portfolio of "actively" managed funds intuitively sounds like a lot of innefficiency to me! (Let alone paying someone to actively manage a portfolio of actively managed funds....)