Comments on: Index Funds: Are They Really Passive Investing?

By: Evolution Of Wealth

Evolution Of Wealth — Sun, 21 Feb 2010 13:58:22 +0000

I see so many people make mistakes with rebalancing. People want to believe that they can set it and forget it but then when stocks (usually it’s stocks) have a big run up or a big drop, people don’t adjust and the end up way over exposed. Then they wonder why their ‘passive’ investing isn’t working right.
A big thing you need to keep an eye on if you are doing it yourself is transaction costs. This could be a decision maker for ETFs vs mutual funds because when you go to rebalance the transactions costs could be quite different. ETFs are charged as a stock trade and mutual funds usually have ticket charges incurred by the transaction. Don’t forget rebalancing usually means selling part of a position (cost?) and buying into another (cost?). Two separate charges?

By: Mr Credit Card

Mr Credit Card — Fri, 19 Feb 2010 18:10:55 +0000

“For every Argentinian default, there’s a dozen non-stories (ten dozen?)” – Argentina isn’t the only country to have defaulted.

Point is again – there is nothing wrong about indexing – but though is it passive in that you do not have to pick individual stocks, it is not passive in that there is still asset allocation decisions to be made…

hence, i would say indexing is passive, but asset allocation decisions using indexes is not.

By: Miranda

Miranda — Fri, 19 Feb 2010 15:38:39 +0000

I kind of agree that there’s no such thing as truly passive investing, since you have to do some work to get started, and make small adjustments. And, of course, it is a lot of mental and emotional work to block out all of the noise!

By: Mike

Mike — Fri, 19 Feb 2010 13:11:36 +0000

“I do believe keeping one eye on the market for extremes of valuation in different asset classes can be worthwhile, especially if you’re following an asset allocation plan as opposed to being 100% in stocks through thick and thin.”

Agreed. I’m just hung up on exactly how to implement such a strategy (How extreme do valuation levels have to become? How far from your originally planned allocation are you willing to stray?) and how to explain such a strategy.

By: Monevator

Monevator — Fri, 19 Feb 2010 09:18:51 +0000

In addition to those practical matters, deciding how much attention the average person is best advised to pay to their index funds is a difficult balancing act.

While I wouldn’t go as far as some voluble commentators, I do believe keeping one eye on the market for extremes of valuation in different asset classes can be worthwhile, especially if you’re following an asset allocation plan as opposed to being 100% in stocks through thick and thin.

But as we’ve discussed many times, ‘some attention’ is likely to ramp up into ‘over trading’ or ‘rampant market timing’ – I’ve seen this for myself, let alone with a more casual investor who is not aware of the dangers.

Also, as Mike has often written, it’s very difficult to pay attention without getting bombarded by emotional messages from the media.

For every Argentinian default, there’s a dozen non-stories (ten dozen?)

I am still thinking out this one. Personally, if someone asks I still suggest cost averaging into an index fund and ignoring it, but whether there’s a middle way for slightly more interested investors – my jury is still out.

By: Mr Credit Card

Mr Credit Card — Thu, 18 Feb 2010 14:50:24 +0000

So imagine that you are an Argentinian and you could invest in an index fund of governement debt (which has defaulted numerous times)!! Can’t call that passive can you?