The Myth Of Purely Passive Investing

July 11, 2017

Even if they outsource the decision-making to a robo advisor, the decisions are still being made. They may be assisted by the shiny rearview mirror of modern portfolio theory, but they’re still decisions—active decisions.

Active Just Happens
Every investment decision is a form of active management. I’m always amused that people think buying the S&P 500 is a passive choice. Nothing could be further from the truth.

Using the S&P 500 as your U.S. equity exposure means deciding you want cap weighting, and that you want your large-cap exposure tempered by about 10% midcaps. You’ve decided not to invest in small-cap stocks. You’ve decided to have a committee decide what stocks are in or out. There are significantly different decisions you could make: You could buy a total-market ETF, an equal-weighted ETF, a pure-large-cap ETF, etc. And that’s just one slice of a portfolio.

How you choose to invest—or what you recommend to your advisory clients—is of course up to you. But I think even the most self-professed passive, index-focused, low-cost ETF investor would do well to recognize that, really, we’re active investors too. We’ve just shifted the source of the active decision-making from a portfolio manager to ourselves. 

 

 

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