Why Active OR Passive?

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  • on September 6th, 2014

“Democracy is the worst form of government, except for all the others” Winston Churchill

Not sure if it’s me, or the bull market, but the passive>active taunt seems awfully loud, exceeded only by the active>passive taunt from 2008. I think both camps are full of it, and can’t help but see parallels to the “save the world” vs. “government sucks” noise.

However one defines “passive” investing, can we agree that it is designed to solve the problem of eroding purchasing power? Noble goal, with no reason to pay high fees for the solution. The problem is twofold; its average participant a) doesn’t fully grasp this problem/solution and b) isn’t wired to ignore the rocky path to the destination. Throw in media hype and unsavory characters, and an investing underclass develops.

Active investing is another animal entirely, neither good nor bad but different. The goal here is lower risk, higher returns, or some combination of the two. Again a set of noble goals, but with the activism comes far more disparate outcomes. The 2 problems listed above still exist, but now we add a) fear of missing out and b) higher fees to the already iffy proposition. Throw in (more)media hype and (more)unsavory characters, and the underclass extends.

Then markets move, and a huge % of end users are left behind, having participated in a set of beliefs that may reflect their long-term financial goals but likely doesn’t reflect their near-term behavioral needs. As a non-partisan, this strikes me as similar to my perception of government. We all want safe streets, good schools, clean air/water, and sources to lend a “hand-up” to those in need. So why arguments instead of discussions?

It’s the messengers. Just like Democrats and Republicans battling for their voice to be heard, the active/passive “debate” crowd leads to an either/or dialogue led by the loudest and most entrenched from each side. The rest of us sit here embarrassed by both sides, wondering how the extremists are allowed to blow it for everyone else.

I think the debate is framed entirely wrong. It’s not active vs. passive, just as it’s not Democrat vs. Republican. It’s an a la carte menu of choices, from which the loudest BSer at either end of the Yelp/Amazon review scale deserves no attention from me, the chooser.

As the consumer, I’m open to your discussion points, your pros/cons, your thoughtful take on why you made your choices. I’m not open to you telling me what I should or shouldn’t do, until you have personally reviewed my needs and wants. Pleasant side effect of an open mind? We sometimes find solutions that, while not scaleable to the “federal” level, can work wonders at the “local” level.

Share your talking points, why you loved or hated a restaurant, why your local government is smart or stupid, why you chose active or passive. And I’ll include that with my experience that some people won’t like my favorite places, some municipal “dictatorships” are more effective than our federal democracy, and some people are better suited for active OR passive investment(or both!).

My take is predictable if you know me. I think financial services as a whole is overly ambitious, bloated, and full of conflicts on interest(sound familiar?). But that shouldn’t keep us from finding examples of best practices being undertaken on a local level. Good governments do exist, as do good active strategies and good passive strategies.

Thankfully, investors can “pack up” and find a home for our personal needs and belief system. Even better, we aren’t stuck with an either/or choice, or forced to pay for services we don’t want or need.

So, while I’m turned off by the so-called debates, I’m energized by the huge opportunity set that lies between the extremes. There truly is something for everyone, and this whole web thing gives us the ability to build our own team of All-Star reviewers in search of good experiences. “I liked” or “I tried” are great; once I hear “you should” or “you can’t” I know I’m in danger of learning more about the speaker than the subject.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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