The battle between active versus passive investment management rages on. The passive investment model is winning as billions of dollars pour into firms like Vanguard. It makes sense as the passive model outperforms the active model most of the time. In one study, 71% of active large cap money managers failed to beat the Standard & Poor 500 Index. In another study by Morningstar, only 4.5% of mid-cap money managers beat their corresponding benchmark. It appears the choice is obvious.
However, the real battle isn’t between active and passive. The real battle is active AND passive against you! The real enemy to long term financial success is the individual investor. Let’s look at some famous investors and firms to make this point. Vanguard recently crossed $4 trillion in assets by focusing on low cost index funds. Warren Buffet has made billions by purchasing undervalued companies and holding them forever. Jim Chanos has made billions shorting stocks of overvalued companies. John Tudor Jones made billions actively trading currencies and commodities while Bill Gross made his billions investing in bonds. These billionaires made their money with different investment models. Through the years these great investors honed their skills by focusing on what they do best. They kept their investment strategy and didn’t abandon their belief system.
The same is true in sports. Bill Belichick, Geno Auriemma and Nick Saban are geniuses at coaching their respective sports. These coaching legends didn’t try to succeed at other sports or abandon their coaching philosophy when times were tough.
When markets are at extremes individuals lose focus and abandon their investment strategy. When the market is rising sharply investors want to chase the hot sector and sell investments not performing as well as others. In a rising market, bonds become less attractive. Who wants to own a bond with the stock market hitting all-time highs? This strategy works well until it doesn’t. As markets fall, investors sell stocks and buy bonds. This popular pattern is known as buy high and sell low.
How can you invest like a billionaire?
- Find an investment style that fits your personality.
- Invest your time in creating a financial plan.
- Invest in simple models. If you understand what you own, you’re more likely to stay invested through rising and falling markets.
- Do not chase returns.
- Do not panic when the market is falling.
- Diversify your holdings.
- Rebalance and review your strategy annually.
- Save your money and keep your expenses low.
- Think generationally.
As the market continues to march on, focus on your financial goals and don’t get caught chasing returns. A well-constructed investment plan and portfolio will treat you well for a long time.
All who are prudent act with knowledge, but fools expose their folly. ~ Proverbs 13:16
Bill Parrott is the President and CEO of Parrott Wealth Management. www.parrottwealth.com
February 20, 2017
 http://corporate.morningstar.com/US/documents/ResearchPapers/MorningstarActive-PassiveBarometerJune2015.pdf, Morningstar Active/Passive Barometer, June 2015, accesses 2/20/17.