Comments on: How Well Does Passive Investing Do In A Secular Bear Market?

By: Intelligent Speculator » Blog Archive » Investment Talking

Intelligent Speculator » Blog Archive » Investment Talking — Sat, 07 Feb 2009 12:30:43 +0000

[...] Where Does All My Money Go discusses how well passive investing do in a secular bear market. [...]

By: Silicon Prairie

Silicon Prairie — Fri, 06 Feb 2009 14:45:55 +0000

“The return of active management” sounds like a good way to convince people – it shows that the real skill in the funds is marketing.

With 80% of equity investments being actively managed they are the index; they’re really trying to claim than the funds can outperform themselves.

It would be amusing to explain to someone who’s all for active management that it can only work if actively managed funds generally underperform the index frequently and by a large amount. Then tell them that by buying an index fund you get the average wisdom of all their brilliant managers while they pay the fees :)

By: Gail Bebee

Gail Bebee — Thu, 05 Feb 2009 21:52:12 +0000

Perhaps graphs of a secular bear and secular bull market would make it easier for readers to see the difference in the two. After all, a picture is worth a thousand words as the old saying goes.

By: Mark Noble

Mark Noble — Thu, 05 Feb 2009 20:06:58 +0000

Investment Club,

That’s exactly what happened during the 1968-1982 secular bear market – where market returns were flat for the period – and from 2000 to 2009. You would have no real positive returns holding the S&P 500 during either of those periods.

Whereas there were many active managers who did extremely well through tactical re-balancing and strong security selection.

Not making money during this period as a passive investor assumes you don’t have a diversified portfolio and are concentrated in one or a few indexes.

There is an argument you can create a alpha using passive products through smart asset allocation. Question is what type of asset allocation outperforms secular bear markets? How often does it need to be rebalanced?

By: InvestmentClub

InvestmentClub — Thu, 05 Feb 2009 14:17:47 +0000

Now that I understand “secular bear market” (thanks to your recent post) I’m a little confused. In a secular bear market won’t index funds lose by definition since they reflect the market and the market is on a long-term net downslide? In fact the only way to beat the market would be to actively manage (ie.g ?

If ETFs classify as passive investing then some of them could gain in a secular bear market.

Am I missing something here?

By: Michael James

Michael James — Wed, 04 Feb 2009 16:20:48 +0000

rm: Investing isn’t zero-sum, but trading is. If we start by assigning everyone the market average and then measure the difference between that and their actual results, the difference can be explained by fees and trading. Collectively, fees and trading are a zero-sum game.

By: rm

rm — Wed, 04 Feb 2009 16:16:37 +0000

I think you require investing to be zero-sum, but it’s not? Right? Dividends and such make it possible for it to not be zero-sum.

By: Michael James

Michael James — Wed, 04 Feb 2009 15:23:16 +0000

It’s funny that advisors (who expect money managers to do well picking undervalued stocks) would be optimistic about active management right now. Expensive mutual funds underperform the index by the widest margin during strong markets. This is mainly because of their cash holdings that drag down their performance most when stocks rise the most.

I suspect the real reason that advisors would be happy is that they expect good stock performance which will made investors happy. Most investors are happy to get a 10% return even if the index goes up 15%. So, during good times it’s much easier to hide 2% or 3% fees and leave investors happy.

By: Brian

Brian — Wed, 04 Feb 2009 14:50:56 +0000

Preet, great post. I’ve probably heard these auguments 100 times in the active vs passive debate. You’ve summarized everything to a t.

By: Preet

Preet — Wed, 04 Feb 2009 14:48:42 +0000

@ rm – I’m assuming (perhaps erroneously?) that “aggregate” is equivalent to “dollar-weighted returns” in which case I believe it is necessarily true.

In fact, once you consider extra transaction costs, higher turnover and therefore more tax then the active investors do even worse.

To take it a step further index trackers are more likely to engage in securities lending to the active investors who may occasionally short stocks – in which case the indexers are charging interest to the active investors who on a whole just use shorting to make side bets on the market as a whole – therefore the picture is even dimmer for the dollar-weighted active return.