Index versus active management "Buy the world"

[paxmao]

Hi, I promised a short post on active and passive management - mostly to myself , and for the general economic education of the forum.

Regarding investment in funds and asset allocation, there are two tendencies of lines of thought. There are maximalists on both of these, but the truth is that they are compatible:

a) Active asset management: This is about picking and choosing assets individually and making changes when the manager or asset allocator considers it adequate. Example: A portfolio of hand picked companies "Apple, Amazon, Taiwan Semiconductors, Constellation Software and Alphamin Resources". Why? Because the allocators thinks they will outperform "the market"(*).

b) Passive asset management: This is about buying all the companies on an market(*). For example the S&P 500 has, unsurprisingly, 500 companies on its list, so you would distribute your investment across these, probably weighting by marketcap of the company (e.g. If Appel is worth 1 Trillion and Facebook is worth half a Trillion, you would have twice as much invested in Apple than in Facebook, etc...). You probably would need to have quite a bit of money to do this since you would need to buy 500 different shares, but there are funds that do it for you (index funds).

This passive strategy  can be applied to different markets using different indexes. One frequent advice for people who do not know much about analysing companies (most of us) or do not have time to go shopping for companies is to "Buy the world" - This means buying and indexed fund that tracks a Global Index of some short (e.g. The MSCI World). Buying an index carries along the recognition of the market being unpredictable or at least unpredictable consistently along a long stretch of time. Is basically the opposite to timing the market.

(*) "The market" is normally how we would call all publicly listed companies on a region, exchange, list, etc... It is understood to be a proxy for the underlying economy of that sector or region.

As you can imagine it is perfectly possible to follow this strategy with cryptoassets. There are some actively managed funds out there and a crypto20 and others that are managed passively.

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[Sterbens]

indeed, we often tend to trust portfolio managers whose reputation and performance are optimal, compared to the process or approach they are taking. However, the two options between active and passive management always have their advantages and disadvantages. apart from investment protection which aims to protect investment funds from fluctuations in currency exchange rates. or the absolute rate of return. additional flexibility in investing which tends to be more active than passive management.

However, if the value of your portfolio falls to a baseline, then you should consult at that time to reallocate assets, perhaps even by completely changing all your investment techniques or methods.

[bitmover]

Hi, I promised a short post on active and passive management - mostly to myself , and for the general economic education of the forum.

Congrats on your initiative.

I follow passive investment strategy for years. This is a very solid strategy,  and there is good literature on the subject

The "founder" of this strategy is Bogle, who created Vanguard funds (which have trillions of dollars on custody, mostly in passive funds)

His main book is the little book of common sense investing.  Amazing book.

https://en.m.wikipedia.org/wiki/The_Little_Book_of_Common_Sense_Investing


There is also a very good blog of the passive investor Mr Money Mustache.

https://www.mrmoneymustache.com/blog/

Passive investing is a very profitable and safe strategy.

[RickDeckard]

Passive investing is a very profitable and safe strategy.

This 100 %. I'm one of those that doesn't think that paying a higher comission for active asset management is really worth mainly due to two reasons:

• By being an active asset management you will incur in higher fees than usual (generally related to the commission that whoever is running it charges you for their work in "trying" to behave better than a particular Index)
• In the long run, most (if not all) active asset management fails to behave better than the index. And the very few that do it, is by like 1-2 % mostly.

Is it really worth to pay more for just an "opportunity" in trying to beat the market? I myself don't think it's really worth. I highly recommend the book shared by bitmover and I would like to add two more:

• A Random Walk Down Wall Street
• The Bogleheads Guide to Investing

And yeah, between the two biggest funds (Blackrock vs Vanguard) I really love Vanguard and their management style / how they care about their clients.

[bitmover]

And yeah, between the two biggest funds (Blackrock vs Vanguard) I really love Vanguard and their management style / how they care about their clients.

Vanguard is really good, but it is not good for aliens like me (people who do not live in the USA). There are heavy taxes on dividends, and most and the more interesting vanguard funds distribute them.

So most of my money is in blackrock (ishares) ETF funds, which are mainly accumulative (automatically reinvest dividends) and there are no taxes on dividends.
Mainly IWDA and EIMI, which are based in Ireland where they have a better tax policy for aliens

[RickDeckard]

And yeah, between the two biggest funds (Blackrock vs Vanguard) I really love Vanguard and their management style / how they care about their clients.

Vanguard is really good, but it is not good for aliens like me (people who do not live in the USA). There are heavy taxes on dividends, and most and the more interesting vanguard funds distribute them.

So most of my money is in blackrock (ishares) ETF funds, which are mainly accumulative (automatically reinvest dividends) and there are no taxes on dividends.
Mainly IWDA and EIMI, which are based in Ireland where they have a better tax policy for aliens

I also don't live in the USA (are we both aliens?  ), and I do still invest in Vanguard (although the management of Vanguard Ireland is different than the one from Vanguard USA).

And my country (or perhaps the tax laws) aren't very friendly for distributive ETF's since I would be always taxed a certain %, so I only go ahead with accumulative ETF's. Have you heard, for instance, about VWCE ? It's a similar to IWDA but it includes emergent markets (so it's basically EMIM + IWDA). It does, however, have a higher TER than IWDA (0.2 %) but in the long run is quite unimportant ...

[Kong Hey Pakboy]

Warren Buffett put a 1 million USD bet against active fund managers that in 10 years his investment on Index funds is going to get a bigger ROI than them and 10 years later, he won the million dollar bet and the ROI is close to double that of the actively managed funds. My point is that index funds is going to win in this match against actively managed funds because it was already proven.