The Active Vs Passive Investing Debate
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- เผยแพร่เมื่อ 9 ม.ค. 2020
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As someone starting off it might not be clear what the difference between active and passive investing is, or why people are so quick to debate the validity of the two approaches. Today, we discuss both sides and how they square up.
This video was sponsored by Squarespace
DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution. Richard Coffin is not registered to provide investment advice and as such does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers.
I only invest in mayonez. never fails!
Omg it's actually Boris
But it’s it an instrument?
Life of Boris ....I moved to Montana and became a dental floss tycoon!
F
I see, boris is in the master mayonez market.
Best intro, we require more of these in the future. The benchmark has been set.
THAT INTRO! I'M DYING
Big brain
We Stan a 500IQ king 👑
Me an intellectual : Buys high and sells low
The biz way
@Luís Filipe Andrade That's the joke
@Luís Filipe Andrade r/whoosh
Me, a galaxy brain: short low and buy back high
You shorting?
I do both so I can argue and fight with myself. When I see my index fund go up and one stock that I chose go down, I'll wonder why I thought I could beat the market. And then when one company goes up and the index fund goes down, I'll believe I'm a genius 😂
Randy Ly ...maybe you could passively invest in one benchmark, whist actively investing by buying lotto tickets....That way, if benchmark goes up,,the consensus views are correct, and if the lotto numbers come in its all moot. 😀
Some people can and do beat the market, but it is a lot of work! Much more than I am willing to do. I do index funds with 85% of my cash and use copy trading with dreamfire52 for the other 15% where they do the active trading for me. This satisfies my need to beat the market without killing myself.
Sometimes in the same day?
😂😂😂😂😂😂
That intro… I hope this channel gets really big, it deserves to be.
lol I use both strategies.
I have a passive portfolio for retirement, and I have an active "fun money" portfolio.
how much have you gotten from active ?
This Is something im starting today :D
Congrats Richard on the huge success of your channel
Thank you very much! Very cool to receive your support :)
As someone who is almost never impressed nor entertained when educators try squeezing memes into their content, that intro was a flawless victory!
I'm actually cursing my finance master and it's really fun to be able to experience a lighter aproach to the content I study on my classes. Great content guys!
I’m a passive investor for two reasons:
- odds are the counterparty to most of the trades that you make in stocks, is an institutional investor. They’ve looked at the data and decided that it’s best to sell that stock at that time. And it’s their job to do that. It’s pretty arrogant to believe that I can make a better decision with less training, less time and less information. I don’t like those odds one bit.
- if I were to become an active investor, I’d have to do a lot of research in order to make good decisions. That’d take hours. If I were honest, I’d have to charge myself for those hours worked, since I could’ve been doing something else during that time. Suppose I spend 4 hours a week doing this research... I could spend those 4 hours on a side job, and I estimate that that may make me like €10/hour. So unless I believe that the extra research is gonna be so awesome that, with my meager assets under management it’ll net me an excess of €40 per week, I’d be better off taking a side job for those 4 hours and investing that money passively.
So... being realistic and humble is what causes me to be a passive investor.
That's a wise move.
The empirical results show that, after fees, the average passive investor out-performs the average active investor.
Even many superstar active managers don't always beat the market consistently year after year.
Automatic like for intro! Always enjoy viewing your content
I think it's important to note that the difference between active and passive is more substantial when you consider net performance over a lifetime of investing.
Net performance because active investing by nature requires higher portfolio turnover than the index. This results in a higher tax drag as well as transaction costs. Additionally, active management requires resources to research opportunities and execute the trades. Even if the manager operated as a non-profit (although I'm not aware of any that aren't for-profit)... because there are a large number of managers, the assets to cover these expenses at each firm are relatively small: higher expense ratios.
A lifetime of investing. At any one point in time, an active manager can beat the benchmark. But because markets favor different styles over time and no single manager is competent in every market. At some point, they may not beat the benchmark sustainably. The investor is left to hope they picked the right manager at the right time. If they're wrong, switching to another manager can incur large transaction fees, termination fees, load fees, and taxes. Even in a no-fee and tax-advantaged scenario, performance chasing often leads to underperformance.
Love the channel! No fancy graphics just straight to the lessons. 👍
I can't stop laughing 🤣🤣🤣 The intro is a 10/10!
Squarespace sponsorship makes me laugh too. /s
too much pewdiepie watch time lmao this is great
Also, stocks held less than one year are taxed as short-term capital gains, which can be about twice as much as stocks held over a year. So your winnings have to be able to offset that if you're operating as an individual.
Excelent topic and helpful information. I would love to see you do a video about how the trading of commodities affects the retail price of such
Love your videos!
Please do one on the current market situation.
Thanks!
This channel is awesome! Keep up with the great work.
I have always felt that this is an instance of two animals disparaging each other without realising "Actually, the environment values both of us because we each serve our roles."
I leave active investing to those with the capital, capacity, time and resources to do so. I thank them for their contribution to market efficiency, give them their alpha and then ride in that wake with my passive strategy.
In the words of President Jack Nicholson before he got killed: Why can't we call just get along?
Really love your videos!!
What about the concept that the time and effort spent chasing alpha has to pay off vs other ways to spend your time? If I make more at my day job per hour than the alpha I get from researching investments, then passive is objectively the logical choice.
Great explanation!! Sadly, in my country, Indonesia, even the passive index funds still cost you around 1.5% of expense ratio. The active mutual funds are even worse, they cost you around 4-6% of expense ratio.
Coba investasi diluar negeri pak
Intro was literally WSB
No? More like r/finance
WSB isn't investing, they're gambling.
It's depends on the participants as their approach with regards to Active n Passive investing I would like to a combination of both of the approaches
Fantastic job, great use of visuals and humor.
You definitely should take advantage of both. You even could split it 50/50, half goes to long term (10y outlook, index funds) and the other half should be researched by yourself and the term of holding can be chosen (yearly/half a year/quarterly). With this strategy you would still get a chance to find the next hit company perhaps, but even if you miss it you still have 50% invested relatively safely (as long as the market stays alive).
*Great comparison between these two!* 👍
That Intro was dope bro.
The funny thing is, those who hand their portfolio to an active manager tend to be the most passive. People who only have 2-3 index funds often are more involved in their investment decisions than someone who pays a manager to invest for them.
The worst of all worlds is to pay a management fee to someone who invests in mutual funds.
Mostly agree, except I do see some value in an advisor helping pick the index funds that someone should invest in based on their goals, risk tolerance and investment horizon. Such an advisor would probably only have to spend a relatively small amount of time on each client, so they might only have to charge a small fee to cover their expenses, and they might be able to provide access to additional financial advice when needed.
That intro is pure GOLD
If you know what you are doing the active investing can be the way to go! The issue is that too many people pick individual stocks without any research and would be much better off just buying the index.
Great video again!
Reveal your portfolio for 1M subs mark? Also, still waiting for the Bagel Buddies series.
Great Video. Thank you for sharing.
Very well done video. Also remember that active mutual funds inherently have a handy cap that shows negative returns. When they do well, investors surge money in causing the manager to make trades at higher prices than they normally would have. This is repeated on the downside.
Wall street journal actually did a study accounting for this and found that the average active mutual fund outperformed its index by about 0.5-1.5%.
It's very hard to track. It also suggests that if you want the benefits of active management you may need to either do it yourself or invest in a hedge fund where they have more control on flows of funds.
Personally, as an active investor, I believe most people benefit from a passive approach as it takes years to master the skills for consistent outperformance. You can't just watch a video or read one book. It's like any other skill. It takes time
Hey could perhaps link the study. Would be very appreciated
@@sweasyco man I wish I linked it. I’m trying to find the specific study. I no longer have the Wall Street Journal and I think that’s where I read it. Totally forgot about this so if I find it again I’ll post it here. That’s one I should have printed out.
I have some doubt about the average active mutual fund outperforming its index at all. The SPIVA scorecard shows that, over 15 years, about 95% of active mutual funds underperform their index.
Whatever the reason doesn't really matter. As an investor, the only thing that matters in the end is total returns.
@@alex2143 that’s true. However, there’s an interesting point on that. I did a study recently on 450 equity funds roughly. What I found was that while large cap funds substantially under perform, mid cap and ESPECIALLY small cap have a habit of being even or out performing their index fund rivals.
The largest average outperformance was in small blend funds where the active manager had access to all strategies. This is because the pricing information is far less efficient outside the large cap funds.
Moral of the story: if you’re buying a large cap fund, go with the index, mid cap do your research but likely index, small cap very likely to do actively managed (also far lower volatility).
Like your style. Keep doing what you doing
Thank you for another amazing video :)
A video idea: evaluate Benjamin Graham’s “the intelligent investor” (W.Buffet’s fave book). Key points and whether they still stand true? What are the opposing views and do they have ground?
Benjamin Graham had the "cigar-butt" way of investing, buying fair companies at amazing prices. Warren Buffett later moved away from this and instead started buying amazing companies at fair prices
Hänsel ....I don't want to sound like I am against active investment, because I am not, but one problem with using "guru" investors, such as Buffett or Graham, (the common ones who are used to "prove" a particular investing argument) is that we cannot rule out survivorship bias, by using the small number of significantly successful investors as examples. (By that I mean that we cannot prove statistically, deductively, or otherwise, that results obtained are due to the course of actions that they recommend. They may, indeed be correct, but the issue is of proving it. ) A secondary issue of using "gurus" which also affects the first issue is that people will follow what gurus do (or tell them what to do), further enhancing their results....This secondary issue becomes even more pronounced as the guru becomes more successful as more and more people follow the gurus recommendations.
Still, if one were an investor, it might be wise to follow the guru, because if their advice makes you rich, then it might be irrelevant whether their information is true or not......The ends justify the means.😀
Great overview! Thank you.
Passive Income: S&P500 ETF’s
Active Income: Handpick and manage companies
Zachary Laid Finding Freedom .....yup, and it is extremely difficult to beat the market by hand-picking individual stocks and even harder still to do it consistently over long time periods. But, some investors can and do so.
The one problem with the active approach (if one does not want to simply rely on luck, and I am not poopooing luck, some people have gotten rich by being very lucky) is that the active investor will have to have some new and/or unique analysis methods/algorithms to make accurate predictions/forecasts enabling them to anticipate market movements before they happen and so profit thereby.
Behavioural finance approaches can only take an active investor so far, since 1) the phenomena are well known to the market participants, and 2) some investors are, indeed, irrational, but not ALL participants are irrational. So, knowing that investor Joe suffers from irrational behavioural biases, does not mean everyone on that market is similarly deluded.
Watching one of your 10min videos is like reading 3 books on the matter......twice!!!! Thanks for making them.
As always......great video sir !
Thank you, great video
Active investing is like playing in a casino, the casino wins 100% of the time. How can you play a game where the rules are not made by you, and can be changed at any time ? A millionaire can just swing the price and you will loose everything, trading bots will always outsmart you and many other things. Seeing as charts and TA is mostly predictions, daytrading is like betting on something, sure you might get lucky, but its just gambling.
If you do you research is has nothing to do with gambling.
@@noahyannis2465 you dont need to do research to understand the most basic logical concepts of economics and investing, you just need to be smart
Fantastic video. Well done!
Thx for releasing that right AFTER my exam on investments :))))
Big oof
Great vid!
I do both. I have an index fund portfolio and a dividend stock portfolio. Brings me the satisfaction of passive income and the peace of mind of massive diversification. Plus it can be exciting to own companies directly.
Yup
Excellent video, good job!
Brilliant intro!
Love the intro
Awesome intro 🔥! Both approaches have their merits IMO and you don’t have to make a binary choice between the two. Nice video 👍
Ostrich Investing ....I agree, and I think, in practice, many others do this. Look up core:satellite approaches to see how institutional investors do this.
Something in favor of regular passive investment is the concept of "Dollar Cost Averaging" principle. Meaning that if you invest 100$ every month you will be buying more shares when the price is low and less when the price is high. It's worth looking up.
Most studies show lump sum is actually more efficient than dollar cost averaging though
Never seen your channel. But your intro was clutch 🤣🤣😂
when the intro hitted the "imbecile", i died laughing xD
Great video!!!!
Your videos are quality!
definitely one of your best videos haha, funny and informative
Content is getting better.
You can do both.
So long as you keep those accounts ABSOLUTELY separate!
Great video.
Why separate
Also FYI i loved the humor worked into this one! haha
You can make money by actively investing but you need to have 3 things on your side:
1. Time
2. Patience
3. Don’t get greedy or don’t buy into fear of losing out
Remember you only become successful if you think successful. I started investing actively some years ago and not gonna lie it’s hard and I wanted to give up but I put more time in stayed patient with my trades (not day trading) and I gave up on only wanting to invest to buy a Ferrari or a mansion in some exotic place because I was greedy and that actually caused me to lose money, now after all this time I actually make good money because I know how the markets work and what drives them. Just follow the 3 things I said there and you will make money investing in the market! Best of luck to everyone out there!
Or you could just invest in an index fund
Please do more of these Intros :D
easiest like is for your channel. always great job . love this channel
Sadly, I've never laid an egg so I don't even have egg baskets.
A mix of both is great (I prefer mutual funds to growth, aggressive growth, speculative growth, and a few sector specific funds)
“Regret Aversion” I like that! I call it “Revenge Trading”.
But if a passive investor trades actively, does an active investor hear a tree fall in the forest?
Mikey Norris ....sadly, only moments before the tree falls on him/her and crushes them into "forest pizza".
lol. good question
Just came across the channel
Great video
I would like you to review the book by Peter Mallouk "5 Mistakes"-2014 or have him call in because his book showing the truth about how many hedge funds and Mutual funds fail to perform is a powerful disclosure.
i use passive for etfs and mutal funds but i want the underlying stocks usually so i actively look at those underlying stocks
Well there’s a few active investments that outperform the usual benchmarks by quite a bit but not all the time and it’s difficult to find a good one that will produce good returns in the future. But passive investors need active investors because the volatility they cause benefits the dollar cost averaging done when you’re investing a monthly amount from your salary.
The middle-ground I've been subscribing to recently is that markets are efficient - but that's because there are people who earn a living buying and selling to get them to that efficiency level. And that activity needs to be compensated. So an activist can outperform the market slightly to earn some money in exchange for helping keep that ticker perfectly balanced on the efficient price for some stock.
That's my view point as well. The large number of active investors trying to arbitrage on their information tends to push markets close to efficiency. There's a sweet spot where any higher, fewer active investors can find arbitrage options, and any lower, more active investors will try. If I want to actively invest, I need to do better than them. If I don't think I can, I'm better off passive investing.
And then of course there's the huge (and still growing) pool of completely ignorant retail traders just throwing distortions into the market, and screwing both sides up.
Great Video. Can you make a video about Margin Accounts and Margin Trading?
I like to employ both strategies, but I know I'm bad at investing so I keep the split at around 80% major index ETFs and 20% my own picks that I try to keep diversified.
So many memes in that intro :D
Hey Richard!
Great videos you had produce I must say.
I have 2 questions, and I would appreciate if you could answer them! Thank you!
1)When executing QE why wouldn't Feds keep some of the reserves to buy long term treasuries so it would not print as much money that resulted in increasing their balance sheet exponentially?
And that brings to question 2.
2)Why Feds would print since they would have cash holdings from the previous sold of securities to the market after the economy recovered and had matured into the later economic cycle that doesn't require the crutches of the past QE?
Thanks but what I wish to see is a more in depth analysis of eg the biggest active funds in the last 10 or 20 years vs index funds and see what has really worked in the past
I would say as a passive investor I'm actually both. I spend time looking at the fundamentals of a business, its balance sheet and other things. While, also trying to outperform the market in a passive manner. Achieving this by buying quality companies for less than their intrinsic value.
I use both strategies
This is quality content
Market are inefficient in the short run but efficient in the long run. Thats why buffet say that the best way to make money for know nothing investor is index fund , yet he still does active investing.
seriously you are the best
No, Ben Felix is actually much better.
This really is one of the most coherent, concise, complete channels on TH-cam
I like to call myself a Passive investor, mainly because I like to invest in stocks for the long run, and before buying a stock I love to research it in order to ensure it will be stable or grow in the long term (At least 5 years)
Well you can call it whatever you want but thats active investing
@@sweasyco
I don’t know how investing for the long term in stocks without trying to outperform the market can be called active investing, but you do you jam.
@@andreimircea2254 Because you have to actively research and pick stocks, even if you dont do it often, action is required.
@@andreimircea2254 And why would you ever pick stocks if you dont think theyre gonna outperform the market? ETFs would be the obvious choice
That was a really fun watch. 10/10
both
they are both good
day trading and swing trading are really useful,
and passive income helps build over time regardless of the market.
the goal of investing is not to beat the stock market
but to go with its ebb and flow.
Do both, but adjust to your strengths and weaknesses.
I select stocks (active) based mainly on their monopolistic clout, and demand at least a 3% yield. I'm passive in that I rarely sell a stock. I've never tried to beat the market.
That intro was genius haha
Food for thought. A lot of 'passive' investors market time, have real estate, or sepertate accounts to trade stonks. A lot of active investors are really just following a growth or value strategy and rebalancing . Since the market constantly moves, no one strategy will ever win. So maybe they arent so different.
Great points about the two sides.
One thing to note is that for every alpha-generating active firm, there MUST be a management company that generates negative alpha. These funds and companies go bankrupt due to outflows going to either index funds or "good performing" funds. As a result, alpha gets harder and harder to get and stock prices are more accurate because less-skilled management firms can't distort the market.
IN other words, active managers set the price of stocks, but indexing makes them more accurate as time goes on.
Eventually there will be a balance between active and passive, probably at 80% passive. Once you're beyond that, there are price distortions that can be exploited.
Bryce I think you’re conflating a ton of economic theories into your version of the you truth, but your theory misses some huge factors. Namely, index funds are not all created equal. Not all indexes reflect the S&P or an S&P TSX composite...which ultimately is what a lot of passive theories are based on, historical returns of US benchmarks (which also do not factor passive fees).
Past returns are not indicative of future returns. Further, passive theories have their own biases. Further, index funds carry their own strategies, and unless you are invested into an index which somehow has equal weighting across all world markets (which in itself is arguably not the best strategy) you are always biased towards one market or another.
I do both. I have a passive long term snp portfolio and i also invest in my own stocks. Monetariliy, im 9/10 passive 1/10 active mostly because im new to active. Even then, im not day trading or anything, just choosing my own companies to invest in
Great video
Well... the reactions to news are often more of support for irrational rather than rational markets as they overreact and then slowly price back to something more fundamental.
Smashed the like button
That intro is 🔥🔥😂
god that intro had me dying LMAO
I keep index funds as the core of my portfolio at about half and try to find more agressive plays with the rest
Curious how Richards active portfolio has done compared to a benchmark over 5 or 10 year periods? Make a video about it!
Hello Richard, I got to your TH-cam channel, coming from Common Sense Investing one (thanks to Grossman-Stirglitz paradox video... awesome).
Your videos are excellent. I have one questions about it: in current video, you show a picture with assets classes (passive funds, active funds...). What's the difference between passive funds and ETF ? (for me, there are alike).
Thanks
Thanks for the kind words, and welcome to the channel :).
"Passive fund" is a broad category, whereas ETF is a specific investment that TYPICALLY (but not always) falls under passive management. In other words, a fund (whether it be a mutual fund or an ETF) is passive if it follows a certain investment strategy such as indexing, and while MOST ETFs are passive, there are some active ETFs out there.
I hope that clears it up!