This week Bloomberg reported an epic shift in the world of US fund management. Investor assets invested in passive index-following funds have now surpassed those invested in the traditional active stock funds. And we thought the publishing of “One Up On Wall Street” exactly thirty years ago by the first fund manager rock star, Peter Lynch, would bring active investing to main street!
Cue an outbreak of hyperbolic commentary predicting the pending death of active management and the dangers of everybody ultimately being invested in the same things in the same amounts at the same time. The purpose of this article is not to debate the merits of investing in low-cost passive investment instruments but rather to highlight how savers can mistakenly believe they are not really actively managing their financial future.
Here are 10 reasons you might be more active than you think.
- Retirement plans
- Life Policies
- Foreign Exchange
- Death and Taxes
You will frequently hear people describing their financial planning as super-safe and therefore not actively investing in anything. Let’s be absolutely clear that keeping all your long term savings on deposit in cash at the bank or under the mattress is an extremely active bet. The bet, if one is trying to preserve your wealth, is that inflation will not erode the purchasing power of your capital over time. We would suggest with the benefit of history that this strategy is highly unlikely to deliver. Furthermore, any one-dimensional approach to investment is an extremely active bet – a 100% exposure to cash, equities, bonds, crypto, property, commodities, gold or any other asset class is an active bet.
There is a large portion of the investing population who invest in equity funds in bull markets and then step out when things get tricky. Unfortunately, that kind of active “activity” is more often than not wealth destructive. The fund giant, Fidelity, crunched the numbers for the period 1980 to 2018 and found that missing the best 5 days of market moves would cost you 35% of your overall returns. Miss the best 10 days and your returns are halved. Miss the best 50 days and you may have to work a lot longer than you hoped…
It never ceases to amaze how passive people are about their pensions. Forget the actual investment strategy but just consider the impact of fees/costs over a very long period of time. We would strongly advise a very active discussion re fees incurred in your pension arrangements. Particularly in a low returns world. Think if you’d just invested in European stocks since 2015 you’d be actually underwater in a so-called bull market. But fees and in-fund hidden fees can seriously increase the pain over a long period of time.
In a previous article “10 Lessons in Wealth Management” we stressed the importance of a financial plan and then sticking to it. That is a sensible active undertaking. However, doing nothing but gathering assets/savings in a random manner over time is a very active but ill-advised route to wealth creation. The probabilities are more skewed towards wealth destruction without a plan.
No, we are not repeating ourselves. Rather we are making the point that the targeted timing of your retirement(60,65, 67…) is an active bet and therefore necessitates more thought in the context of the range of instruments you will use to invest over the decades and the shift in risk appetite required as you approach the target retirement date.
These are active investments and again require advice which fits your overall financial plan.
Not unlike fund managers who use different investment instruments to protect against downside risk – hedges in market-speak – your life will be peppered with a variety of hedging instruments related to your work/business, transport and property. An active approach to monitoring the fees and the actual cover provided by these insurance policies will avoid disappointment and real wealth destruction.
You may over time have assets or income streams that are denominated in a foreign currency. Again be proactive in how that exposure is managed and avoid a mismatch between your domestic currency/returns requirements and the ultimate values of the foreign assets/cashflows. Doing nothing is, we repeat, a very active bet!
No different from a business, there is an ongoing requirement to invest in yourself in a rapidly changing world. Education is a real investment that can deliver increased income and prolong your relevance in the commercial world. Be active includes maintaining an active brain.
We don’t need to spend too much time on the former but it is one of the two ‘certainties’ in life. So succession planning is a worthwhile proactive initiative. However, before then we’d like you to live a little and proper tax management/planning should be conducted in a very active manner. Whatever you might feel about investment fees the truly outsized costs or benefits of tax decisions render many active investment discussions moot. Attention to tax treatment of your investments can be considered an investment strategy in its own right. And it pays to be active.
If you re-read the ten points again you will realise there actually is no such thing as a passive option. Doing nothing is simply being ‘active’ but probably resulting in wealth destruction. In fact, exactly the same point can be made with regards to the frenzied active versus passive debates consuming Wall Street right now. Time will ultimately show that passive strategies were more ‘active’ than originally intended, particularly if investors take fright along the investment journey. Remember those ten most important days(Fidelity) to stay in the market and keep our ten ‘active’ reasons in mind too. They do make a difference. You can too.
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