Passive Investing
Passive Investing
How do you intrepret Passive Investing? The general meaning of the word Passive is:
1. passive meaning, definition, what is passive: not acting to influence or change a situation; allowing other people to be in control:
2. accepting or allowing what happens or what others do, without active response or resistance.
3. to play a passive role. 4. inert or quiescent. 5. influenced, acted upon, or affected by some external force, cause, or agency; being the object of action rather than causing action (opposed to active ).
I definitely don't want others to be in control even though I only hold a small group of stocks and rarely, if ever sell. So I guess I'm active, or there a better description?
So is picking and holding etf's passive? Will one never change those holdings regardless of what the etf holds or how they change the holdings?
1. passive meaning, definition, what is passive: not acting to influence or change a situation; allowing other people to be in control:
2. accepting or allowing what happens or what others do, without active response or resistance.
3. to play a passive role. 4. inert or quiescent. 5. influenced, acted upon, or affected by some external force, cause, or agency; being the object of action rather than causing action (opposed to active ).
I definitely don't want others to be in control even though I only hold a small group of stocks and rarely, if ever sell. So I guess I'm active, or there a better description?
So is picking and holding etf's passive? Will one never change those holdings regardless of what the etf holds or how they change the holdings?
Re: Passive Investing
I always understood passive investing to mean index investing (i.e., the investor is simply following an index as opposed to trying and picking individual stocks).
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Re: Passive Investing
http://web.stanford.edu/~wfsharpe/art/active/active.htm
William Sharpe wrote:Of course, certain definitions of the key terms are necessary. First a market must be selected -- the stocks in the S&P 500, for example, or a set of "small" stocks. Then each investor who holds securities from the market must be classified as either active or passive.
- A passive investor always holds every security from the market, with each represented in the same manner as in the market. Thus if security X represents 3 per cent of the value of the securities in the market, a passive investor's portfolio will have 3 per cent of its value invested in X. Equivalently, a passive manager will hold the same percentage of the total outstanding amount of each security in the market.
- An active investor is one who is not passive. His or her portfolio will differ from that of the passive managers at some or all times. Because active managers usually act on perceptions of mispricing, and because such misperceptions change relatively frequently, such managers tend to trade fairly frequently -- hence the term "active."
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Re: Passive Investing
Agree passive means holding the whole market. Even though I haven't traded this year, buy and hold isn't necessarily "passive".
Re: Passive Investing
"At its height, Nortel accounted for more than a third of the total valuation of all the companies listed on the Toronto Stock Exchange (TSX),"
Pity those passive investors back when Nortel was 1/3 of the TSX.
Pity those passive investors back when Nortel was 1/3 of the TSX.
Re: Passive Investing
I'd say picking and holding broad based index ETFs is passive investing. For example, the TSE300 Composite or the S&P500 or similar. I assume one could hold VTI, SPY and XIC forever. The boutique ETFs don't count because that is slicing and dicing sectors, or themes, or 'pick your poison'. By defintion, stocks will come and go out of the indices and thus into and out of the ETFs.cannew wrote:So is picking and holding etf's passive? Will one never change those holdings regardless of what the etf holds or how they change the holdings?
Many who are indexers at heart though also recognize the Canadian market is 'thin' and loaded with cyclicals and commodities and that stock picking can be advantageous. IOW, indexing probably works well for most markets, but not necessarily all markets. Some of us index ex-Canada and stock pick Canada.
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Re: Passive Investing
This is one reason why some recommend XIC (which is capped) as opposed to XIU.cannew wrote:Pity those passive investors back when Nortel was 1/3 of the TSX.
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Re: Passive Investing
It was I who suggested a passive portfolio did not necessarily have to be built of etfs but could consist of a buy-and-hold stock portfolio (thread: http://www.financialwisdomforum.org/for ... 19#p580019). I was basing this on the notion that either portfoilo needed some intital decisons about constituents, rebalancing, etc. but then was held 'passively' rather than actively managed. I'm not really too fussed about the definition though, if there is a consensus that passive is restricted to etf's that's fine.
I did do a few searches ahead of this post out of interest. People's defintions do seem to vary and have probably changed over time (with the advent of etf's, etc.). So some of us are maybe still using 'old terminology'.
A few interesting discussions:
http://www.portfolioprobe.com/2012/02/2 ... ally-mean/
I divide “passive” into three groups:
index funds
buy and hold
other strategies with low turnover and low effort
And:
http://www.pragcap.com/the-myth-of-passive-investing/
The correct differentiating aspect between active and passive investing is that an active investor tries to “beat the market” on a risk adjusted basis while a passive investor tries to “take the market return”. Therefore, the investor who deviates from global cap weighting is explicitly stating that they can “beat” the risk adjusted returns of the aggregate global financial asset portfolio. In this sense, we are all active because we all deviate from global cap weighting. Of course, the industry does not adhere to this strict definition so it’s not very useful to call everyone an active investor. Instead, it is more useful to adhere to the aforementioned definition.
Finally:
http://www.investopedia.com/terms/p/pas ... esting.asp
Passive investing is an investment strategy that aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum. The idea is to avoid the fees and the drag on performance that potentially occur from frequent trading. Passive investing is not aimed at making quick gains or at getting rich with one great bet, but rather on building slow, steady wealth over time.
Traditionally, passive investors attempt to replicate market performance by constructing well-diversified portfolios of individual stocks, a process that can require extensive research... With the introduction of index funds in the 1970s, achieving returns in line with the market became much easier.
I did do a few searches ahead of this post out of interest. People's defintions do seem to vary and have probably changed over time (with the advent of etf's, etc.). So some of us are maybe still using 'old terminology'.
A few interesting discussions:
http://www.portfolioprobe.com/2012/02/2 ... ally-mean/
I divide “passive” into three groups:
index funds
buy and hold
other strategies with low turnover and low effort
And:
http://www.pragcap.com/the-myth-of-passive-investing/
The correct differentiating aspect between active and passive investing is that an active investor tries to “beat the market” on a risk adjusted basis while a passive investor tries to “take the market return”. Therefore, the investor who deviates from global cap weighting is explicitly stating that they can “beat” the risk adjusted returns of the aggregate global financial asset portfolio. In this sense, we are all active because we all deviate from global cap weighting. Of course, the industry does not adhere to this strict definition so it’s not very useful to call everyone an active investor. Instead, it is more useful to adhere to the aforementioned definition.
Finally:
http://www.investopedia.com/terms/p/pas ... esting.asp
Passive investing is an investment strategy that aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum. The idea is to avoid the fees and the drag on performance that potentially occur from frequent trading. Passive investing is not aimed at making quick gains or at getting rich with one great bet, but rather on building slow, steady wealth over time.
Traditionally, passive investors attempt to replicate market performance by constructing well-diversified portfolios of individual stocks, a process that can require extensive research... With the introduction of index funds in the 1970s, achieving returns in line with the market became much easier.
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Re: Passive Investing
There are many definitions, used in the industry, because attracting passive investors into non-indexed smart-beta products is a lucrative busine$$. So, to make a smart-beta product attractive, you just need to claim that it is "passive" because it is based on methodical stock picking selection with no manager discretion involved and that it uses a patient process to buy and sell securities.
But, for those who want the benefits of Sharpe's theorem about beating the aggregate of all active investors after fees, there's only one good definition; the one included in the theorem. (Just to make sure there's no misunderstanding here; we're talking about beating all active investors as a group, not about beating each and every active investor; and it's after fees).
Note that the theorem states explicitly that one can select any market to apply the theorem to. It isn't limited to the global aggregate of all markets. As I said, there are big incentives $$$ to label active funds as passive. But, sometimes, they do the reverse using the fear tactic; they portray all index funds as active by choosing a definition that no fund can ever meet.
I have to admit; it's outstanding financial porn marketing.
But, for those who want the benefits of Sharpe's theorem about beating the aggregate of all active investors after fees, there's only one good definition; the one included in the theorem. (Just to make sure there's no misunderstanding here; we're talking about beating all active investors as a group, not about beating each and every active investor; and it's after fees).
Note that the theorem states explicitly that one can select any market to apply the theorem to. It isn't limited to the global aggregate of all markets. As I said, there are big incentives $$$ to label active funds as passive. But, sometimes, they do the reverse using the fear tactic; they portray all index funds as active by choosing a definition that no fund can ever meet.
I have to admit; it's outstanding financial porn marketing.
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Re: Passive Investing
Passive in it's strict definition is impossible. Your heart beating is "passive".cannew wrote:So is picking and holding etf's passive? Will one never change those holdings regardless of what the etf holds or how they change the holdings?
Holding an entire market index is as close to "passive" as one can get when investing.
Re: Passive Investing
+1AltaRed wrote:Many who are indexers at heart though also recognize the Canadian market is 'thin' and loaded with cyclicals and commodities and that stock picking can be advantageous. IOW, indexing probably works well for most markets, but not necessarily all markets. Some of us index ex-Canada and stock pick Canada.
This is what I have migrated towards. I have a large holding in VCN that I won't be dumping (even though it is tempting now that it has broken even) but I am certainly not adding to it. The recent collapse of oil and its effects on the Canadian index were illuminating. Knowing it logically is one thing, seeing it in action is another and I try to learn from incidents like these.
Re: Passive Investing
IF and when cyclicals (mainly commodities) take off again, index holders will outperform the stock pickers of banks, utilities, telecoms and pipelines. It is the nature of the beast. The VCN holder will be very happy.
The overall issue is that over long periods of time, commodity companies have a knack for destroying shareholder value and hence underperform the broader market. I've dabbled in a few commodity stocks along the way and (almost) every time I do that, I have my head handed to me.....or I am lucky to eventually make a few bucks. These stocks are meant to be traded, not held ambivalently.
The overall issue is that over long periods of time, commodity companies have a knack for destroying shareholder value and hence underperform the broader market. I've dabbled in a few commodity stocks along the way and (almost) every time I do that, I have my head handed to me.....or I am lucky to eventually make a few bucks. These stocks are meant to be traded, not held ambivalently.
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Re: Passive Investing
Totally agree. That's why some of us have done so well against the market over extended periods. There will obviously be some periods where the cyclicals outperform but on balance probably not.AltaRed wrote:IF and when cyclicals (mainly commodities) take off again, index holders will outperform the stock pickers of banks, utilities, telecoms and pipelines. It is the nature of the beast. The VCN holder will be very happy.
The overall issue is that over long periods of time, commodity companies have a knack for destroying shareholder value and hence underperform the broader market. I've dabbled in a few commodity stocks along the way and (almost) every time I do that, I have my head handed to me.....or I am lucky to eventually make a few bucks. These stocks are meant to be traded, not held ambivalently.
Re: Passive Investing
I was actually expecting the Canadian index to have faired much worse. When I compare VTI vs XIC over the last 1 year period, I get:Koogie wrote:The recent collapse of oil and its effects on the Canadian index were illuminating. Knowing it logically is one thing, seeing it in action is another and I try to learn from incidents like these.
It looks like, at the worse spots in the graph, XIC was only behind VTI by about 6%. Given the sharp drop in oil prices, I was expecting a bigger impact.
Re: Passive Investing
A more appropriate graph would include currency effects, and that would show a much worse comparison.gobsmack wrote:It looks like, at the worse spots in the graph, XIC was only behind VTI by about 6%. Given the sharp drop in oil prices, I was expecting a bigger impact.
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“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
Re: Passive Investing
That's a good point. But there would not have been a way of avoiding the forex impact even if actively picking Canadian stocks and avoiding O&G.adrian2 wrote:A more appropriate graph would include currency effects, and that would show a much worse comparison.gobsmack wrote:It looks like, at the worse spots in the graph, XIC was only behind VTI by about 6%. Given the sharp drop in oil prices, I was expecting a bigger impact.
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Re: Passive Investing
Here's a TellTale Chart* of XIC vs VUN zoomed over the last 12 months:adrian2 wrote:A more appropriate graph would include currency effects, and that would show a much worse comparison.gobsmack wrote:It looks like, at the worse spots in the graph, XIC was only behind VTI by about 6%. Given the sharp drop in oil prices, I was expecting a bigger impact.
Note that this comparative chart includes reinvested distributions.
XIC did worse than VUN from late July 2015 to mid January 2016, and then XIC recovered relative to VUN. Overall, in Canadian dollars, it was a wash between the US and Canadian markets over the last 12 months (visually).
According to Morningstar.ca, XIC had a 5.80% 1-year total return and VUN had a 6.20% 1-year total return as of July 26, 2016. That's effectively pretty close (a difference of less than 0.5%).
* The way to read the chart is this: when the line goes down, it's because XIC is doing worse than VUN. When it goes up, it's because XIC is doing better than VUN.
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Re: Passive Investing
I have been doing a bit of both. I buy XIC as my baseline but I have also been picking some TSX60 stocks. So in the end, I tilt the index somewhat towards the stocks that I prefer and I improve the dividend yield of the overall portfolio.AltaRed wrote:Many who are indexers at heart though also recognize the Canadian market is 'thin' and loaded with cyclicals and commodities and that stock picking can be advantageous. IOW, indexing probably works well for most markets, but not necessarily all markets. Some of us index ex-Canada and stock pick Canada.
Re: Passive Investing
Would a blend of XIC and sector ETFs that avoid commodities/cyclicals (e.g., XUT, XST) be a good solution for this problem? The total MER would be higher but I am wondering if this would be a good/simple solution for this problem.AltaRed wrote:Many who are indexers at heart though also recognize the Canadian market is 'thin' and loaded with cyclicals and commodities and that stock picking can be advantageous.
EDIT: ... or more broadly, is there an appropriate way of dealing with this problem without resorting to stock picking.
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Re: Passive Investing
The primary way I deal with it is by including bonds in my portfolio. They are an excellent portfolio ballast and they dampen the volatility of stocks.gobsmack wrote:EDIT: ... or more broadly, is there an appropriate way of dealing with this problem without resorting to stock picking.
According to The Stingy Investor Asset Mixer, from 1961 to 2015 (a period of 55 years), a 100% Canadian stocks portfolio returned 9.327% with a standard deviation of 16.338%. A 50/50 Canadian Stocks/Canadian bonds portfolio returned 8.884% with a standard deviation of 8.839%, barely 0.443% less than a 100% Canadian stocks portfolio, but with a significant reduction of 7.499% in standard deviation.
The secondary way I deal with it is that I diversify my stock holdings by putting half of my stock allocation into international stocks (without the use of currency hedging).
I keep the whole thing simple by holding a Three-ETF portfolio, made of three total-market index ETFs.
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Re: Passive Investing
A brief look at XUT and XST does not encourage me to think that by so doing you will have meaningfully compensated for some of the "deadweight" within XIC. This is probably the case for any combination of sectorial ETF's that I am aware of. However, an examination of the products available from other firms may be worthwhile to see if any deal with this issue.gobsmack wrote:Would a blend of XIC and sector ETFs that avoid commodities/cyclicals (e.g., XUT, XST) be a good solution for this problem? The total MER would be higher but I am wondering if this would be a good/simple solution for this problem.
EDIT: ... or more broadly, is there an appropriate way of dealing with this problem without resorting to stock picking.
What is required is an ETF fitting your description which, surprisingly, does not yet exist...
Until then, I think (IMO) that the only good strategy within Canada is to stockpick and between 10 and 20 picks is probably sufficient.
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Re: Passive Investing
Yes, but implicit in holding more than one index is that you rebalance.
The definition of the word passive is accepting or allowing what happens or what others do, without active response or resistance.
Although not its primary intent, couldn't rebalancing be interpreted not as passive but, dare I say it, a primitive form of active value investing?
For shame!
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Re: Passive Investing
The definition of "passive", in the indexing universe, goes back to Nobel Laureate William Sharpe's theorem, which defines passive in the context of one market. A Three-ETF portfolio covers three distinct markets: the domestic stock market (no exposure to foreign currency), the domestic bond market, and the collection of international markets as a group (exposed to foreign currency).Descartes wrote:The definition of the word passive is accepting or allowing what happens or what others do, without active response or resistance.
Although not its primary intent, couldn't rebalancing be interpreted not as passive but, dare I say it, a primitive form of active value investing?
For shame!
Choosing to passively invest in each of three different markets and to rebalance one's portfolio from time to time to keep their proportions in line with one's asset allocation is not what is meant by "active" investing.
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Re: Passive Investing
Indeed - implicit in holding one market is that rebalancing is meaningless.The definition of "passive", in the indexing universe, goes back to Nobel Laureate William Sharpe's theorem, which defines passive in the context of one market.
Which is a perversion of Sharpe's definition: rebalancing has been introduced which means "periodic active value investing".A Three-ETF portfolio covers three distinct markets: the domestic stock markets (no exposure to foreign currency), the domestic bond market, and the collection of international markets as a group (exposed to foreign currency).
Saying it does not make it so. Look beyond your narrow prejudices and evaluate arguments objectively.Choosing to passively invest in each of three different markets and to rebalance one's portfolio from time to time to keep their proportions in line with one's asset allocation is not what is meant by "active" investing.
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Re: Passive Investing
Do you consider investors who don't invest all of their money as a single lump sum, but instead choose to invest money as soon as available on payday, as active, too, even if they invest it all into a single total-market ETF, because they "actively" buy multiple times (during accumulation) and sell multiple times (during retirement)?Descartes wrote:Saying it does not make it so. Look beyond your narrow prejudices and evaluate arguments objectively.
It is very easy to let common sense on the side, just for the sake of an internet forum argument.
I've already debunked the idea of describing passive as active in http://www.financialwisdomforum.org/for ... 17#p580037:
longinvest wrote:But, sometimes, they do the reverse using the fear tactic; they portray all index funds as active by choosing a definition that no fund can ever meet.
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