I recently taught a course to retirees on passive investing at the University of Georgia’s Osher Lifelong Learning Institute (OLLI). Many in the class had portfolios with various brokers or financial planners, some local, some far away, and the portfolios were complicated and laden with high-cost mutual funds as well as individual stocks and bonds. They were not making much money, and they wanted to hear about a different approach. Continue reading
Remember Donald Rumsfeld, Defense Secretary from 2001 to 2006? In response to a reporter’s question about weapons of mass destruction, he offered us valuable epistemological insight into known knowns, known unknowns, and unknown unknowns. Here’s a link if you have 35 seconds to enjoy a little history.
Mr. Rumsfeld never mention unknown knowns, with which investors often wrestle. Continue reading
Most of us enjoy movies, and there is a new one freely available on the Internet entitled, “How to Win the Loser’s Game.” If you have or want investments, this video is an excellent way to learn the essentials of investing. Fix some popcorn, open a soft drink and settle in front of your TV or computer. You will hear clear explanations of key ideas along with good interviews of people involved in creating modern investing.
Viewers can watch the film in one showing of 80 minutes, or in ten parts of varying length. The film comes from Britain, and the narrator has a pleasant British accent, adding perhaps a touch of class.
With the end of 2014, year-end investment returns are coming in, and two noteworthy results are these:
- Passive investing, especially with Vanguard Group, continues to gain momentum
- Passive investing, according to preliminary results, produced higher returns than many competing styles of investing.
Can you imagine a world where people who followed a few simple guidelines about diet and exercise but never visited doctors had health outcomes as good as those who do see doctors? Can you imagine a world in which wonderful music might come from people who played instruments but had little musical knowledge, training or experience?
A great deal!—to answer the title question. Three examples will illustrate the loss associated with active investing, or, stated positively, the gain from passive investing. The examples build on last week when I showed that active and passive investing had to achieve the same average gross returns. Yet active investing costs more, so in the end, the net returns to retirees are smaller with active investing.
Active investing links retirees with financial planners, brokers and actively managed mutual funds. Active investors believe they can identify low-priced stocks to buy, or that they can predict which stocks will drop in price so they can sell. In addition to individual stocks and bonds, they often buy actively managed mutual funds where a fund manager does the buying and selling. Continue reading
Many retirees invest passively by buying shares in low-cost index funds that are designed to track selected markets. I have illustrated that approach in previous posts.
Many other retirees, and many younger investors, actively manage their investments. Some retirees do their own research and analyses while others hire brokers, financial planners or other advisers to manage their investments. They hope to achieve superior performance—to beat the market—by relying on extra effort, knowledge and skill. Continue reading