the ongoing "active" vs "passive" debate

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Re: the ongoing "active" vs "passive" debate

Post by Jungle »

I have read arguments of dividends vs passive and some saying, if you want dividends, you can just sell your shares and make "home made" dividends to pay retirment or living expenses, etc. But wouldn't this be bad in a market downturn, like 2008, you would be selling shares at 20-40% discount, and increasing portfolio longevity risk?

I guess the counter to this is that, you're supposed to be in fixed income to prevent this from happening when retired..

But wouldn't it be better to have stocks that increase dividends every year to give you income growth that will be inflation protected instead of selling off your portfolio?
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Re: the ongoing "active" vs "passive" debate

Post by AltaRed »

Not everyone, indeed few investors, have the capital to leave it alone in retirement. Most need to deplete their capital to supplement the income stream... which is what SWR (sustainable withdrawal rates) is all about. Thus they need to have a portfolio diversified enough to mitigate selling equities when they are down. In a downturn like 2008, dividend streams will invariably be affected (downward) to some extent regardless of how well one picks stocks with a record of dividend growth.
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Re: the ongoing "active" vs "passive" debate

Post by parvus »

Jungle wrote:But wouldn't it be better to have stocks that increase dividends every year to give you income growth that will be inflation protected instead of selling off your portfolio?
Apart from what AltaRed said about drawing on capital to fund retirement, dividends have little to no direct connection with inflation protection -- they are at the mercy of the company, not the economy.

It may well be that dividend-growth companies are value stocks in disguise, with sturdy businesses. But it could take a long time to realize that value. Still, dividend growth is a good signal.

Market mavens are still unclear on this. Should earnings be reinvested or paid out as dividends. Internet companies may make good investments, buying startups with their earnings. Or not. Remember Nortel. Sometimes it's just best to return the profits to the shareholders, as Microsoft is doing.
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Re: the ongoing "active" vs "passive" debate

Post by Bylo Selhi »

JACK BOGLE: An Elegantly Simple Formula Shows Why Passive Investing Will Earn Higher Returns Than Active Investing
Jack Bogle wrote:Mr Smith describes the index mutual fund as a “passive parasite”, rejecting the value of the innovation I created in 1974. He suggests that the index fund simply takes advantage of the market efficiencies created by active manager/traders. His article assumes that my confidence in the index fund is based on the “efficient market hypothesis”. This is not so. Whether markets are efficient or inefficient is beside the point. The cost matters hypothesis is all that is needed to explain why indexing works: gross return in the market as a whole, minus the costs of obtaining that return, equals the net return investors actually receive. Paradoxically, it is the active manager who is the real parasite.
[my bold]
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Re: the ongoing "active" vs "passive" debate

Post by parvus »

Who profits from casinos? Punters, management, gummints? :wink:
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Re: the ongoing "active" vs "passive" debate

Post by ghariton »

Buy-and-hold is not dead:
There never was any logic behind the "buy-and-hold is dead" argument. Might it have lucked into being useful? Not a chance. Coming off the 2008 downturn, the U.S. stock market has roared to perhaps its best four and a half years in history. It has shone in absolute terms, posting a cumulative gain of 125% since spring 2009. It has been fabulous in real terms, with inflation being almost nonexistent during that time period. It's been terrific in relative terms, crushing bonds, cash, alternatives, and commodities, and by a more modest amount, beating most international-stock markets as well. This is The Golden Age. We have lived The Golden Age, all the while thinking it was lead.

To put the matter another way, those who left stocks for bonds, cash, alternatives, or commodities following 2008 have lost roughly the amount of their original investment in opportunity cost. That is, a $10,000 investment in U.S. stocks in January 2009 would be worth $22,000 today, as opposed to $13,500 for the typical intermediate-bond fund, and between $10,500 and $13,000 for cash, alternative, and commodities funds.

<snip>

The reason that buy-and-hold is the norm is that it's deucedly difficult to implement anything else. As outlined in Tuesday's column, three professors recently concluded that even a fully rational investor who follows an optimal trading strategy, making errors neither of emotion nor math, can't outgain buy-and-hold stock investors when using real-time data (as opposed to studies that show above-market results because of hindsight bias). For real-world investors who are probably imperfect, the news gets even worse.
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Re: the ongoing "active" vs "passive" debate

Post by ghariton »

In the U.S. (so may not apply to Canada)
Domestic equity markets continue with the impressive double-digit rally over the past 12 months. However, the gains made by the domestic passive indices did not translate into active management. Most active managers in all the categories except small-cap growth underperformed their respective benchmarks for the trailing 12 months.

The performance figures are equally unfavourable for active funds when viewed over the three- and five- year horizons. However, a large percentage of international small-cap funds continued to outperform the benchmark regardless of the time period, indicating that active management opportunities are still present in this space.
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Re: the ongoing "active" vs "passive" debate

Post by Bylo Selhi »

I suspect that if SPIVA were to show 10yr, 15yr and longer periods the results would be even more compelling in favour of passively holding broad-based index funds/ETFs. (Perhaps they don't because of the dearth of indexed securities, apart from Vanguard's, over such long periods.)

In any case, even if someone is willing to bet money that "their" fund manager will outperform an index, that's still not enough. Most investors have a portfolio of asset classes so they'd need to assemble a team of managers who will in the aggregate beat a portfolio of index funds. That seems to me to be a fool's bet.
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Re: the ongoing "active" vs "passive" debate

Post by SQRT »

AltaRed wrote:Not everyone, indeed few investors, have the capital to leave it alone in retirement. Most need to deplete their capital to supplement the income stream... which is what SWR (sustainable withdrawal rates) is all about. Thus they need to have a portfolio diversified enough to mitigate selling equities when they are down. In a downturn like 2008, dividend streams will invariably be affected (downward) to some extent regardless of how well one picks stocks with a record of dividend growth.
I think you are right. But a 4% div yield approximates a reasonable SWR. I only had one div reduction in 08-09 and it was immaterial. This was probably mostly luck, but still.... Lack of diversification is the biggest issue for me.
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Re: the ongoing "active" vs "passive" debate

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A quote from the comments from "ghariton's" Buy and Hold article above.

"The ability of an investor, particulary one withdrawing funds to live on during a serious downturn is seldom discussed in a pro buy and hold article. The math and the emotions are pretty viscious and most can't sit passively buy and watch their life savings evaporate and those that do don't do so well. Take a $1,000,000 portfolio thet dropped to $500,000 (actually the S&P 500 lost 58% from high to low) and a retiree initially withdrawing $50,000 per year or 5%. A 5% withdrawal rate becomes 10% and a 20% gain magically becomes a 4% recovery. ($500,000-$50,000) *1.2 = $540,000. So preventing large losses becomes critical during the distribution phase of life. So it's not all about returns, rather the focus should be on a strategy that provides sustainable income returns for a long time and one that can be adheared to during even the most viscious declines."
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Re: the ongoing "active" vs "passive" debate

Post by SQRT »

@Brian5000. Yes, it was hard during the 08/09 period. My net worth was decimated, but the divs kept coming and I could live on those so I didn't have to sell anything. My position would not be normal. Nor is my ability to hold during very sharp downturns. The next big downturn should be easier as the last one has left some scar tissue. In Canada the banks, telcos, pipes, utilities give div yields in the 4% range and are unlikely to cut their divs. Pretty safe but some upside. Good for retired guys like me.
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Re: the ongoing "active" vs "passive" debate

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So it's not all about returns, rather the focus should be on a strategy that provides sustainable income returns for a long time and one that can be adheared to during even the most viscious declines."
I think this is the key wording. Was the investor 100% equity or did they have fixed income, DB pension, CPP, OAS (or equivilant) which provided income. IMO, cause I'm a NN, I would think it unwise to only rely on one income source (dividends) in retirement.
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Re: the ongoing "active" vs "passive" debate

Post by AltaRed »

BRIAN5000 wrote:I think this is the key wording. Was the investor 100% equity or did they have fixed income, DB pension, CPP, OAS (or equivilant) which provided income. IMO, cause I'm a NN, I would think it unwise to only rely on one income source (dividends) in retirement.
Agree on this for virtually everyone, not just NN types. Dividend junkies have yet to experience a situation where dividend income might be curtailed severely. Think about the poor USian who was overweight in financials in 2008. Yes, Virginia, it can happen here too.
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Re: the ongoing "active" vs "passive" debate

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BRIAN5000 wrote:
So it's not all about returns, rather the focus should be on a strategy that provides sustainable income returns for a long time and one that can be adheared to during even the most viscious declines."
I think this is the key wording. Was the investor 100% equity or did they have fixed income, DB pension, CPP, OAS (or equivilant) which provided income. IMO, cause I'm a NN, I would think it unwise to only rely on one income source (dividends) in retirement.
Agree. In my case our dividends represent about half of our spending with pensions being the rest. Divs are growing rapidly though and since our pensions are not COLA'd divs will eventually represent a much higher proportion. Good problem to have, I think. I guess I am a dividend "junkie" What kind of "junkie"are you?
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Re: the ongoing "active" vs "passive" debate

Post by Bylo Selhi »

Take a $1,000,000 portfolio thet dropped to $500,000 (actually the S&P 500 lost 58% from high to low)
Red Herring alert!

Why would anyone "take" that? It's nonsensical. How many people with a $1M portfolio, especially retirees, invest it 100% in US equities? As others have said, there are dividends. There are also the benefits of diversification, e.g. fixed income with interest income, etc.

There are also strategies that recent retirees can use to ride out the sort of portfolio shocks that came in 2008 (e.g. a 5 year bond ladder with ~1 year's needs in each rung. At 4% SWR that would be less than 20% of portfolio, allowing for other income like dividends...)
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Re: the ongoing "active" vs "passive" debate

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BRIAN5000 wrote:
So it's not all about returns, rather the focus should be on a strategy that provides sustainable income returns for a long time and one that can be adheared to during even the most viscious declines."
I think this is the key wording. Was the investor 100% equity or did they have fixed income, DB pension, CPP, OAS (or equivilant) which provided income. IMO, cause I'm a NN, I would think it unwise to only rely on one income source (dividends) in retirement.
(Ahem..... What's a "NN"???)
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Re: the ongoing "active" vs "passive" debate

Post by Pickles »

ockham wrote:
BRIAN5000 wrote:IMO, cause I'm a NN, I would think it unwise to only rely on one income source (dividends) in retirement.
(Ahem..... What's a "NN"???)
Nervous Ninny, I'm guessing.
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Re: the ongoing "active" vs "passive" debate

Post by AltaRed »

It means Nervous Nellie to me. Regardless, same message.
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Re: the ongoing "active" vs "passive" debate

Post by ockham »

Thank you, got it, whether it's "Ninny" or "Nellie", a NN is someone who is Needlessly Nervous.
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Re: the ongoing "active" vs "passive" debate

Post by BRIAN5000 »

"Nellie", a NN is someone who is Needlessly Nervous.
Once your so confident you think you know what you're doing along comes something/someone who shows you you that maybe you don't. A bit of scepticism or trepidation is a good thing in my books. Keeps me from going All-In with just a so-so hand.


The other night in a meeting someone was expounding the virtues of the Beating The TSX strategy. Ok it's pretty good but how much money do you really want to have in only 10 Canadian stocks which may be overly sector weighted and represents only 4-6% of the world market. Especially when this guy spends a lot of time in the US.
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Re: the ongoing "active" vs "passive" debate

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Brian5000 wrote:The other night in a meeting someone was expounding the virtues of the Beating The TSX strategy. Ok it's pretty good but how much money do you really want to have in only 10 Canadian stocks which may be overly sector weighted and represents only 4-6% of the world market.
What does it matter whether it's 4-6% or 80-100% as long as you're consistently getting a return that beats the market?

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Re: the ongoing "active" vs "passive" debate

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Beats what market? You don't believe in at least a little diversification? It's been doing well but I will take my chances on a broader approach.
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Re: the ongoing "active" vs "passive" debate

Post by like_to_retire »

BRIAN5000 wrote:Beats what market? You don't believe in at least a little diversification? It's been doing well but I will take my chances on a broader approach.
With the world economy all connected now, I don't put much store in it. I'll take the DTC and stick to Canada.

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Re: the ongoing "active" vs "passive" debate

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BRIAN5000 wrote:Beats what market? You don't believe in at least a little diversification? It's been doing well but I will take my chances on a broader approach.
You are entitled to your views and I would agree that all else being equal, diversification is worthwhile. I would rather have the DTC credit, which represents about 20% more divs in my pocket, though. Being a dividend "junkie", I will take a 20% head start any day.
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Re: the ongoing "active" vs "passive" debate

Post by ghariton »

David Moenning:
While the Vanguard's of the world have spent gazillions of dollars trying to convince the public that there is simply no way to beat the market, their argument is patently false. There are any number of strategies that will handily outperform the stock market over long periods of time.

To prove the point, let's review a handful of strategies designed to (a) keep investors in stocks during bull markets and (b) get investors out of stocks during bear markets.
The problem with passive investing? Investors typically don't have the discipline to stick with it.
The first point is that most investors don't have the emotional make-up to "set it and forget it" when their retirement is on the line. Nope, when an investor watches their "401K turn into a 201K" all that "long-term" stuff they agreed to when they started investing tends to go right out the window.

As such, having a strategy to get the heck out of the way when the bears come to call and then to re-enter the market when the bulls return and the bears go back into hibernation, is the way to go.
So what should investors do to implement successful active strategies?
One can indeed beat the market, if they so desire. It's that simple.

However, the key is that an investor must (a) define a strategy and then, more importantly (b) stick to the strategy when times get tough.
Hmm... So the key flaw to passive investing is investors' inability to stick with it. And the key to active investment is investors' ability to stick with it.

Maybe the difference isn't active versus passive investing, but rather calm versus panicky investors.

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