Interesting hypothesis. Perhaps you could provide some evidence to support this contention? I have looked in vain using internet search engines for any evidence of correlation between the advocacy of ‘Passive Investing’ (whatever that may be defined as) and the high price of stocks. I see no such claim or indication anywhere, except by you.

Thanks.

That’s a simple and accurate description of the primary point of contention.

My view is that markets work when investors are educated about how they work and that the massive promotion of the Passive approach (as it was initially developed) has led to investors not being educated about how markets work. If most people understood how much the valuation level that applies on the day you purchase an index fund affects your long-term return on that fund, prices would self-regulate (once prices got too high, millions would sell and prices would return to reasonable levels).

The problem in recent years is that the heavy promotion of Passive Investing concepts has led millions to believe that high prices are not dangerous. It’s that belief that caused prices to go to such insane levels and remain at those levels for so long.

Rob

Richard: Excellent explanation. Thanks for stopping by to contribute.

Well this is really not a true definition of “passive investing”. There are two diametric belief systems about the market and the nature of markets. The first is that markets work (passive), the other is that markets do not work (active).

The market works belief (passive) is what is known as the belief that the market is efficient and states that the markets are random and unpredictable and that they will quickly reflect new information and knowledge as it becomes availbale.

The market fails belief (active) states that markets react slowly enough to allow some individuals to analyze and predict the future in order to take advantage of mispricings and pass value onto the investor.

Because most investors have never even questioned the two differences or let alone read about them – they try to marry the two or make up their own definitions.

Taking the passive approach to investing what you are doing is using Modern Portfolio Theory to build a portfolio that is globally diversified among various asset classes using index type funds or structured index funds to deliver market returns for the asset classes in the portfolio. The goal is to provide maximum diversification and correlation effects while maximizing returns for a given level of risk.

It is also a life long process because you understand investments, the markets, and how they work. You do not market time. However, you do rebalance your portfolio in order to maintain your stated risk tolerance throughout the life of your portfolio.

I hope this helps some of you.

PS. Please don’t bash. I am only trying to give some insight.

It’s like they’re just along for the ride. However, if you’re a passive passenger along for the (stock market) ride, what happens when you actually have to get out and drive?

My answer to that would be that we should lower our expectations (and adjust other variables accordingly) rather than attempt to beat the market.

Neal/Wealth Pilgrim: At times, passive investing will underperform what?