Active vs Passive
Here you’ll find all the posts on active vs passive investment management.
If you have any questions which aren’t answered in the articles below, please let me know.
NB: If there’s an article title with no link, it means it’s an idea for a future post.
- Active vs passive – what’s in a name?
- Can anyone be truly passive? In search of the Global Market Portfolio
Active vs passive performance – the evidence
Arguments for active management
- What is factor investing?
- Valuations vs long term returns
- Risk parity
- Irrational markets
- You’re not human
Arguments for passive management
- Active vs passive performance: The evidence
- Performance persistence
- Why do passives outperform?
- In theory: Sharpe’s Arithmetic of Active Management
- In practice: The predictive power of fees
- The market is efficient
- The market is becoming more efficient
- Positive skew
- Requires no forecasting
- Has no minimum investment requirements
- Has no capacity constraints (no style drift)
- Doesn’t require picking winning fund managers in advance (luck vs skill)
- Doesn’t require deciding whether to stick with underperforming managers, and has no temptation to chase the latest hot manager (lower behaviour gap)
- Doesn’t incur the risk of a manager having to close/suspend/merge their fund (survivorship bias)
- Has fewer conflicts of interest
- Becomes more powerful the more people adopt it
- Other benefits of passive
- Takes less time to monitor
- Less stressful, fewer decisions required
- ‘Beating the market’ is not a financial goal
- Problems with smart beta
- Part 1: The cyclicality of factors
- Part 2: Defining a factor is hard
- Part 3: Factors can change
- Part 4: Factor decay
- Part 5: It’s impossible to know when a factor stops working
- Part 6: Factor dilution
- Part 7: Academia is not real life
- Part 8: Backtesting
- Valuations and timing the market
- Closet indexing and herding
- Peer group rankings
- Self-selecting benchmarks
- The uselessness of forecasting
- Focus on things you can control
- Asset allocation drives most of your returns
Debunking the myths of passive investing
- Is passive investing causing a bubble?
- The claim: Passives are causing a bubble
- What is a passive investment?
- The evidence:
- Sharpe’s Arithmetic of Active Management
- The market share of passive investing
- Is passive investing setting prices?
- Passive investing and market crashes
- Is passive investing making the market more concentrated?
- Are large stocks getting larger?
- Where are all the outperforming active managers?
- Why passive investing is increasing market efficiency
- Summary of the series
- Actives can help you avoid crashes
- Actives outperform in less efficient markets
- Passives buy all stocks, actives buy only good stocks
- Actives give a chance of outperforming
- Active management works for bonds
- Passives don’t contribute to price discovery
- Passives don’t allocate capital efficiently or manage corporate governance
- Passives reduce dispersion and increase correlations
- The market is irrational
- ‘We are not average’
- Passives are untested in a downturn
- Passives have only done well because of QE
- Passives are un-diversified
- Index tracking is momentum investing