Active Management vs. Passive Management

Active Management vs. Passive Management

Index Investment: Lovers and Haters

Maintaining radical positions about any subject is a recurring fact in the world of investment. Depending on their affinities, biases, and preferences, investors take a position as being on one “side” or the “other side” and engage in bloody dialectical battles around this or that issue. The typical discussion has long revolved around technical versus fundamental analysis. In addition, within the “fundamental” camp, for example, internecine wars have also broken out, such as the deep value versus growth rivalry. The “bad vibes” are also spread to different types of assets, such as cryptocurrencies against the rest of the world. Or the war between investment strategists with radically acrimonious positions, such as dividends versus Compounders. The list is endless.

Active management and passive management are just one more example of these cockfights without a happy ending or practical purpose worth reviewing. The supporters of both fight to the death to be right and wield their corresponding arguments using graphs excels, and charts. In this sense, it has recently been perceived, or at least many have perceived it, as a movement against indexing, that is, the appearance of Bogle haters and his theories. Perhaps as a reaction to the previous movement in the opposite direction carried out by enthusiastic lovers.

The issue itself is not serious and its origin should be sought in business, as usual, that is, the good absolute and relative results of one strategy compared to the other and the change in the trend of those results. What this means is nothing more than the old story, connatural to the human race, of defenestrating and merciless with the loser and unashamedly flattering the winner. However, it is striking that both the “haters” and the “lovers” do not reflect on what they may have in common.

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For example:

  1. Both active and passive management is investment strategies and therefore come with advantages and disadvantages. That one has done better than the other since 2009 (and generally does better in the long run) does not mean that its pros and cons have disappeared, but rather that the stock market has risen, and how it has risen. and the results are, therefore, positive, they only come to reinforce what some previously believed without stopping to think that every coin has a head and a tail. In other words, the market has only shown you the good side.
  2. Whether the investor decides to index himself or resorts to active management, either institutionally or individually, the only reality that no one can deny is that neither operates in the vacuum of the abstractions of charts and excels. . This means that the investor is a human being of flesh and blood with his own personal and particular circumstances that range from his age to his job stability, as well as his family situation and any other individualizing element. In other words, both assets and liabilities must be contextualized depending on their circumstances and investment objectives.
  3. It is absurd to think that an investor cannot use passive management at the same time as active management. In other words, they are not mutually exclusive strategies but rather complementary ones. What is exclusive is religious fanaticism because if your god is the only true one, then the deities of your neighbor will have to be heresy and idolatry. But fortunately for investors, active management and passive management are not religions. They only become such if he decides to. Therefore, they do not compete, a priori, in the field of faith, even though investment in shares is based on faith and belief in a better future hand in hand with rational optimism. The contaminated meat index investor does not touch if he has shares in a personal capacity that he chooses based on the criteria that he considers most appropriate.
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Therefore, the battles and wars around active and passive management are nothing more than small-time hobbies and wars based, on occasion, on the performance of the last year. Perhaps what happens is that an investor has failed to implement a certain investment strategy and then it is better to condemn the strategy than himself. Perhaps it happens that the investor has had bad luck with the moment in which he started investing and after a few years he is still in the red despite having been a “good believer” and having followed all the precepts and commandments of rigor. So it is better to blame the strategy than to recognize oneself that one was not a believer or had as much faith as at the beginning of his exodus he had thought he had.

However, and finally, we must always keep in mind that controversies and rows tend, like violence, to be carried out by very active minorities that make a lot of noise. However, the nuts of many investors are usually spread over several baskets and one might wonder to what extent the apparent rivalry between active management and passive management is not just another imposture from the world of finance and investment, reverberated by the echo of social networks. Or, put another way, it is very likely that the majority of investors combine both strategies with better or worse success and in equal or unequal balances and, therefore, that “haters” or “lovers” pertains to a boisterous minority but not at all representative of what the average investor tends to be. Which will be most likely.

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