In Part One of the Active vs Passive Debate, I discussed how difficult it is for funds to outperform their benchmarks over long time horizons. However, every decision we make on how we allocate our money within our own investment portfolios is an active decision. And I think this is where “active” management becomes critical.
What does that mean? Well, it certainly doesn’t mean to go out and day trade. Or month-trade. Or even quarter-trade. And I’m pretty sure those aren’t real words, by the way.
But, let’s say you have a portfolio of 60% stocks and 40% bonds. How you divvy up that 60% stocks – US vs international, large companies vs small companies, etc – is an “active” decision. As is how you divvy up the 40% bonds – government vs corporate, US vs int’l, etc. So, the idea that passive investors are actually passive is both true and false. Even the most passive FUND investors have a bias towards active management within their PORTFOLIOS.
Whaaaat? How can that be? Even Vanguard themselves, the kings of passive investing, have allocation funds (funds that include stocks, bonds and cash all in one fund) that are grossly skewed towards US stocks. Some of those funds have US stocks making up 80% of their overall allocation, yet the US only produces a little under 50% of the world’s total economic output. And the US makes up a little less than 50% of the total market capitalization in the world. So, in essence, Vanguard is making an active bet on over-allocating toward the US.
Interestingly, if you tally up all of the financial assets in the world, you’d have something that more closely resembles about 45% stocks and real estate and 55% bonds