{"id":15446,"date":"2017-06-12T21:02:15","date_gmt":"2017-06-13T01:02:15","guid":{"rendered":"http:\/\/goldstocksforex.com\/?p=15446"},"modified":"2017-06-12T21:02:15","modified_gmt":"2017-06-13T01:02:15","slug":"the-dangers-of-passive-investing","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2017\/06\/12\/the-dangers-of-passive-investing\/","title":{"rendered":"The dangers of passive investing"},"content":{"rendered":"<p>There is a lot to be said for passive investing.<\/p>\n<p>Key Takeaways from <a href=\"http:\/\/mscomm.morningstar.com\/activepassive\/\">Morningstar&#8217;s Active\/Passive Barometer Report<\/a>:<\/p>\n<ul>\n<li>Actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons.<\/li>\n<li>Failure tended to be positively correlated with fees.<\/li>\n<li>Fees matter. They are one of the only reliable predictors of success.<\/li>\n<\/ul>\n<p>Prof. Burton Malkiel, author of A Random Walk Dow Wall Street, writes in the <a href=\"https:\/\/www.wsj.com\/articles\/index-funds-still-beat-active-portfolio-management-1496701157\">WSJ<\/a>:<\/p>\n<blockquote><p>During 2016, two-thirds of active managers of large-capitalization U.S. stocks underperformed the S&amp;P 500 large-capital index. When S&amp;P measured performance over a longer period, the results got worse. More than 90% of active manager underperformed their benchmark indexes of a 15-year period.<\/p>\n<p>&#8230;..In 2016 investors pulled $340 billion out of actively managed funds and invested more than $500 billion in index funds. The same trends continued in 2017, and index funds now account for about 35% of total equity fund investments.<\/p><\/blockquote>\n<p>Volatility is also near record lows as the market grows less reactive to short-term events.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" title=\"CBOE Volatility Index (VIX)\" src=\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2017\/2017-06-13-vix.png?w=525&#038;ssl=1\" alt=\"CBOE Volatility Index (VIX)\" \/><\/p>\n<p>Lower fees and lower volatility should both improve investment performance, so what could possibly go wrong?<\/p>\n<p><strong>Investors could stop thinking.<\/strong> <\/p>\n<p>If passive funds are the investment of choice, then new money will unquestioningly flow to these funds. In turn the funds will purchase more of the stocks that make up the index.<\/p>\n<p>Prices of investment-grade stocks that make up the major indices are being driven higher, without consideration as to whether earnings are growing apace. <\/p>\n<p>And the higher index values climb, the more investment flows they will attract. Driving prices even higher in relation to earnings.<\/p>\n<p>More adventurous (some would say foolhardy) investors may even start using leverage to enhance their returns, reasoning that low volatility reduces their risk.<\/p>\n<p>The danger is that this becomes a self-reinforcing cycle, with higher prices attracting more investment. When that happens the market is in trouble. Headed for a blow-off.<\/p>\n<p><strong>Investing in passive funds doesn&#8217;t mean you can stop thinking.<\/strong> <\/p>\n<p>Don&#8217;t lose sight of earnings. <\/p>\n<p>When prices run ahead of earnings, don&#8217;t let your profits blind you to the risks. <\/p>\n<p>And start thinking more about protecting your capital.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>There is a lot to be said for passive investing. Key Takeaways from Morningstar&#8217;s Active\/Passive Barometer Report: Actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons. Failure tended to be positively correlated with fees. Fees matter. They are one of the only reliable predictors of success. Prof. Burton Malkiel, author &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/thepatientinvestor.com\/index.php\/2017\/06\/12\/the-dangers-of-passive-investing\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;The dangers of passive investing&#8221;<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[37,52],"tags":[1280,1808,2610],"class_list":["post-15446","post","type-post","status-publish","format-standard","hentry","category-active-investing","category-index-funds","tag-etfs","tag-index-funds-2","tag-passive-investing"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>The dangers of passive investing - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The dangers of passive investing - the patient investor\" \/>\n<meta property=\"og:description\" content=\"There is a lot to be said for passive investing. Key Takeaways from Morningstar&#8217;s Active\/Passive Barometer Report: Actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons. Failure tended to be positively correlated with fees. Fees matter. They are one of the only reliable predictors of success. Prof. Burton Malkiel, author &hellip; Continue reading &quot;The dangers of passive investing&quot;\" \/>\n<meta property=\"og:url\" content=\"https:\/\/thepatientinvestor.com\/index.php\/2017\/06\/12\/the-dangers-of-passive-investing\/\" \/>\n<meta property=\"og:site_name\" content=\"the patient investor\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/profile.php?id=61572934660810\" \/>\n<meta property=\"article:published_time\" content=\"2017-06-13T01:02:15+00:00\" \/>\n<meta property=\"og:image\" content=\"http:\/\/static.incrediblecharts.com\/images\/2017\/2017-06-13-vix.png\" \/>\n<meta name=\"author\" content=\"ColinTwiggs\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"ColinTwiggs\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/\"},\"author\":{\"name\":\"ColinTwiggs\",\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/#\\\/schema\\\/person\\\/cb072791ac83e8bae585007c133d54a5\"},\"headline\":\"The dangers of passive investing\",\"datePublished\":\"2017-06-13T01:02:15+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/\"},\"wordCount\":349,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/#organization\"},\"image\":{\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/www.incrediblecharts.com\\\/images\\\/2017\\\/2017-06-13-vix.png\",\"keywords\":[\"ETFs\",\"index funds\",\"passive investing\"],\"articleSection\":[\"Active Investing\",\"Index Funds\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/\",\"url\":\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/\",\"name\":\"The dangers of passive investing - the patient investor\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/#primaryimage\"},\"image\":{\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/www.incrediblecharts.com\\\/images\\\/2017\\\/2017-06-13-vix.png\",\"datePublished\":\"2017-06-13T01:02:15+00:00\",\"breadcrumb\":{\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/\"]}]},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/#primaryimage\",\"url\":\"https:\\\/\\\/www.incrediblecharts.com\\\/images\\\/2017\\\/2017-06-13-vix.png\",\"contentUrl\":\"https:\\\/\\\/www.incrediblecharts.com\\\/images\\\/2017\\\/2017-06-13-vix.png\"},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/index.php\\\/2017\\\/06\\\/12\\\/the-dangers-of-passive-investing\\\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\\\/\\\/thepatientinvestor.com\\\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"The dangers of passive investing\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\\\/\\\/thepatientinvestor.com\\\/#website\",\"url\":\"https:\\\/\\\/thepatientinvestor.com\\\/\",\"name\":\"The Patient Investor\",\"description\":\"Smart. 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The problem is that once prices begin to fall the previously \u201cpassive indexer\u201d becomes an \u201cactive panic seller.\u201d With the flood of money into \u201cpassive index\u201d and \u201cyield\u2026","rel":"","context":"In &quot;Active Investing&quot;","block_context":{"text":"Active Investing","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/active-investing\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":7864,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/06\/03\/smart-and-stupid-arguments-for-active-management-the-reformed-broker\/","url_meta":{"origin":15446,"position":2},"title":"Smart and Stupid Arguments for Active Management | The Reformed Broker","author":"ColinTwiggs","date":"June 3, 2013","format":false,"excerpt":"Are active or passive investment strategies best? Josh Brown at The Reformed Broker writes there are both smart and stupid arguments to be made for active management: Marketocracy's Ken Kam, who has spent a career studying and vetting active managers, touches on one of each type in an interview with\u2026","rel":"","context":"In &quot;Active Investing&quot;","block_context":{"text":"Active Investing","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/active-investing\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":57034,"url":"https:\/\/thepatientinvestor.com\/index.php\/2024\/08\/28\/the-case-for-an-active-risk-weighted-investment-strategy\/","url_meta":{"origin":15446,"position":3},"title":"The case for active, risk-weighted investment","author":"Colin Twiggs","date":"August 28, 2024","format":false,"excerpt":"This is a quiet week. Unless war breaks out in the Middle East or core PCE inflation gives a nasty surprise on Thursday. We have been using the time to review our risk management model and assess the effect of various combinations of indicators on portfolio performance. Starting with a\u2026","rel":"","context":"In &quot;Active Investing&quot;","block_context":{"text":"Active Investing","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/active-investing\/"},"img":{"alt_text":"Active allocation between S&P 500 and the Bank of America AA Corporate Bond index","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-08-27-risk-spx-aa.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-08-27-risk-spx-aa.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-08-27-risk-spx-aa.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-08-27-risk-spx-aa.png?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":14899,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/03\/06\/ceo-pay-is-rigged-barry-ritholz\/","url_meta":{"origin":15446,"position":4},"title":"CEO pay is rigged | Barry Ritholz","author":"ColinTwiggs","date":"March 6, 2017","format":false,"excerpt":"From Barry Ritholz: CEO pay is rigged. If that sounds more like a late-night presidential tweet than a fact, let\u2019s consider the evidence. The compensation packages of the chief executive officers of America have been rising faster than just about any rational metric upon which they are supposedly based. \u201cCEO\u2026","rel":"","context":"In &quot;Index Funds&quot;","block_context":{"text":"Index Funds","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/index-funds\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":10692,"url":"https:\/\/thepatientinvestor.com\/index.php\/2014\/08\/23\/the-decline-and-fall-of-fund-managers-wsj\/","url_meta":{"origin":15446,"position":5},"title":"The Decline and Fall of Fund Managers | WSJ","author":"ColinTwiggs","date":"August 23, 2014","format":false,"excerpt":"Jason Zweig predicts the demise of active fund managers: So active management won\u2019t disappear entirely. But index funds and comparable exchange-traded portfolios now account for 28% of total fund assets, up from 9% in 2000. And no wonder. Over the past one, three, five and 10 years, only one-fourth to\u2026","rel":"","context":"In &quot;Index Funds&quot;","block_context":{"text":"Index Funds","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/index-funds\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/15446","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=15446"}],"version-history":[{"count":0,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/15446\/revisions"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=15446"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=15446"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=15446"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}