The Passive Investing Bubble

We are in a passive investing bubble.

I am not sure how it ends, who and what the pricks are and how bad it really is, but you should NOT just set and forget. Tony Robbins says you can, if you buy his book. He the guy who said GET OUT of the markets in 2010.

I am all for ETF’s. I am all for investing made easier and diversification. I am all for the cost cutting associated with robo investing and advising.

But – I am also for paying top dollar for financial advisors. I am all for speculating, trading, investing, even done actively.

This is the era of the mobile web and social mentorship. Anyone with savings should be allowed to choose.

Obviously, people are doing this, but it is not making it to the cover of major business publications. If it does, it is mocked. AngelList (I am an investor) had a banner year. TAKE A READ. I am also an investor in Crowdability, whose founders want to create a Morningstar of Crowdfunding. Chris Sacca turned $6 million into more than a Billion in FOUR years.

I have covered the topic of active investing many times on this blog since I started it in 2006. My blog itself is really just a chronicle of active investing. Two recent posts are here, and here.

My pal Josh Brown reads Barron’s so I don’t have to. The cover has always told me more about the markets than anything inside. This week’s is humorous:

Josh says ‘every year the same prayer‘. I strongly disagree with his sentiment.

I don’t prey.

I have hoped for sure. I have rooted. I have dug in. I have wasted time. I have had a bucketful of zero’s.

But, I am grateful that I have never handed off my money to be ‘passively’ managed. There is just no such thing.


    • AJStillman says:

      Don’t think I’ve ever heard you speak on this: What’re your thoughts on Wealthfront as a company and as a service?

      • I love wealthfront as a product. I have an account. I am not sure it helps my returns though so far. Too soon to tell. I just dislike not being able to concentrate in a few stocks

      • they cant really offer service because of the margins. it is software and wont be for everyone like interactive brokers on the institutional side. I think community matters in the new world

        • AJStillman says:

          Maybe “by service” a different way to think of diversification… % in my wealthfront account, a % on my own picks, % a Motif or two of my choosing, and a % following those knuckleheads at SL50 = D

  1. JFinDallas says:

    +1 I agree with so much of this. Getting very tired of the trend following crowd and claims that active management is a foolish endeavor and nobody can outperform the market.
    This trend of indexing and “passive” investing explain a lot about the way the market is behaving now and how narrow it can be at times.
    Anyway if anything most people would benefit from being more “actively” involved in the investing process and actually understand what goes on with their money.

    • well I think trend following is under utlized but i have a wealthfront account and though they sell boring as good I dont like feeling overdiversified and not underatanding what exactly i own. too dumb for me.

      • JFinDallas says:

        I agree with a lot of the things that W. Buffet says, but I mostly agree with him that diversification is dumb in a lot of cases…

  2. Rachel says:

    Great post! I totally agree – blindly putting your money in a passive fund isn’t the answer. That’s why I am so passionate about educating young investors – if you believe passive investing is the best move, go ahead and stick your money in an index! Just do it because you believe in it, not because you aren’t educated enough in the market to choose an alternative. Unfortunately for many, particularly my age, I think it’s the latter.

  3. Chris in snapchat, uber, instagram were no-brainers. I woulds have done the same if I had access. instead stuck with crappy S&P 500 stocks that lag for years at a time and occasionally fall 50% in a day

  4. pointsnfigures says:

    Can we split hairs on this idea? Not that I have any hair to split. I’ll agree to disagree with you. For the average investor-and 90% of investors are indeed average, they are better off being a passive investor. They are better off not paying fees. Just put the money in the account regularly, let it grow. Passive investors have done better since the last crash. I don’t think there is a bubble in passive investing. The market goes up, and it goes down. All depends on your time horizon.

    That being said, it’s possible to “beat the market” in a variety of ways. However, it requires a ton of work-or a ton of money. Pick. The money side is easy. You pay for hyper fast connectivity, buy a bunch of superfast computers, and hire math geeks that can write algos. You can beat the market. They call that HFT and its cost of entry is the biggest barrier. Second is brain power it takes to be good.

    The other way is the way you trade. Immerse yourself in the market and try to tease out information that isn’t easily seen by every one else. Then you speculate on that information. If you are right, you make a buck. Wrong, lose.

    I don’t find it irresponsible to recommend active trading. I was an active trader on the floor. My edge was order flow, information, and speed. I could act a split second faster than anyone, and on a Friday unemployment morning at 730am it could mean tens to hundreds of thousands of dollars. The other key is I could cover my losers faster than anyone too-meaning I could limit my loss.

    Those days are gone. You are wearing the position and when you need an exit door, you have to take a number. You aren’t first. That’s why the psychology of managing your winners is so fucking hard.

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