Passive Investing is a Choice
Passive investing is the best choice for many investors, for one reason. It requires virtually no maintenance, aside from an annual tweaking. If you are a busy guy or gal who doesn't want to be bothered with the details of what's going on in the market, then passive investing is for you. I don't have a problem with this strategy at all.
Why do you think Warren Buffett is a fan of passive investing? Why does he say that after he's gone, he wants his family to invest passively? Because it's simple, relatively easy to maintain, and it virtually guarantees that you will outperform the active mutual fund managers, hedge funds, and stock-pickers. That's a pretty convincing argument in favor of passive investing, wouldn't you agree?
Passive investing is not for everyone
The problem I have with passive investing is not that it doesn't work well... it does. The problem I have is that for some investors (quite a lot of investors), passive is not the best way to go. Let me explain.
Passive investing requires the investor to stay fully invested in the equity market regardless of whether it's in a bull phase or a bear phase. The passive promoters say that nobody can time the market, so it's better to just stay fully invested at all times. And there's something to be said for that viewpoint. Over the very long-term equities have delivered roughly 10% per year in appreciation. What's not to like about that?
Here's what's not to like about that - Bear Markets. Advocates of a passive approach will tell you that bear markets are just a natural occurrence and given time, they always blow over. Really? Tell that to the folks who put their entire life savings into the stock market in 1929. It took them 28 years to get back to even.
Or tell that to the folks who started investing in 2000. They have enjoyed a paltry 3.09% annual return for the last 18 years. My point is that bear markets are not only destructive in terms of the loss of capital, they are also destructive in terms of wasted time.
Bear Market Recovery Times
Below is a table that shows how long it took for investors to recover from each of the bear markets since the Great Crash of 1929. The shortest time to recover was the bear market of 1987, which was devastating in its severity. October 19, 1987 remains to this day as the worst 1-day decline in recorded history.
Most investors that I knew at the time were so freaked out that they sold nearly every stock they owned. That turned out to be a mistake, because it only took 1.9 years for the market to regain its previous high.
Investors in 1929 and 1933 were not so lucky. For them, it took 25-28 years to fully recover. Many didn't live long enough to see the recovery.
Final Thoughts
How you choose to approach investing is up to you, and you alone. In today's market, the buy & hold approach is being touted as the best, or in some cases the only, way to approach investing.
That may apply to a large portion of the investing public, but it is not the best approach for everyone. If you think you can stomach a market that drops 50% or more, and takes many years to fully recover, then buy & hold is the right approach for you.
For the rest of us, who would prefer not to waste years waiting to get back to even, active asset allocation is a better way to go. Active asset allocation is not market timing. It's a sensible risk-management strategy that gradually lowers exposure to equities when market conditions are poor, and increases exposure when conditions improve.
If you would like details about how my active asset allocation methodology works, contact me at info@zeninvestor.org