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Free Online Wealth Summit – Vanguard Senior Analysts on Active vs. Passive Investing
The stock and bond markets can be a fearful and terrifying place, especially considering their effect on your financial portfolio. No one wants to see red numbers on their account statement after all. Unfortunately, that’s part of investing.
On average, the stock market enters bear market territory (a drop of twenty percent or more) about one in every four years. We’re eight years into a bull market now without really coming close to bear market territory.
I found some insight from two of Vanguard’s senior analysts over at the Wealth Summit. The Wealth Summit is a collection of interviews and panels with thirty or so money experts. Companies like Vanguard, TIAA, and Dimensional Fund Advisors have speakers at the Summit. There’s a New York Times bestselling author as well.
I was intrigued with the Vanguard interview. Any unbiased insight into the current state of our global economy, stock and bond markets can be helpful with your financial planning over time.
At the Wealth Summit, Chris Tidmore, senior investment strategist in Vanguard’s investment strategy group, and Andrew Patterson, senior economist in Vanguard’s investment strategy group, discussed the current market outlook and the impact passive vs. active investing has on your portfolio.
NOTE: For those unfamiliar with active and passive investing strategies, active investing means you or your manager is timing and trading, ducking and dodging their way in and out of securities in an effort to beat the benchmark index. Passive investing is the opposite – buying a whole lot of securities and staying invested at all times.
According to Vanguard’s analysts, the global economy is in better shape than recent years as it continues to stabilize following the crisis of 2008. Growth has hovered around two percent, which is low relative to pre-crisis numbers but will probably be the new norm.
Factors resulting in slower growth include an aging population/workforce and relatively low productivity numbers. Many fear the impact Brexit will have on the global economy, but Andrew says it’ll probably be a two-year process before we truly know the results.
As we trend back towards targeted inflation, Andrew believes price growth around two percent is good sign of what will be a sound economy. It’s important to keep this lower interest rate environment in mind when setting earnings expectations going forward. Returns may not be high as before.
The analysts break down the policy agenda of the new administration into five key tenants: tax reform, infrastructure, deregulation, trade policy, and immigration. Out of those five, the executive branch has the most power over trade and immigration, while infrastructure and tax policy have the most power to shape the economy, dictating growth, inflation, and asset returns.
It’s most likely that interest rates will remain relatively low for a while. Andrew says investors can expect six – eight percent returns in an equity-weighted portfolio and four – six percent returns in a balanced portfolio.
According to Chris, it’s not as simple to separate active and passive management styles as previously. In a sense, my simplistic definition above doesn’t hold water with Vanguard because it’s more complicated.
Formerly, active investing was associated with traditional stock picking and mutual funds, while passive investing essentially meant anything that followed an index. However, times have changed.
If the market capitulation of your portfolio stays in the same market, it’s considered passive. Any deviation from that strategy, such as a decision to overweight a certain segment of the market, is known as active investing.
That being said, it can still be difficult to distinguish between an active and passive manager. A passive manager might make changes to a portfolio regarding market capitulation at the creation of the fund, but active managers continue to make active decisions throughout the implementation and lifespan of the fund—that’s where the main difference lies.
Andrew urges investors to consider three factors when making decisions about an active manager. First, identify the right talent. Andrew typically focuses on the qualitative aspects of a firm such as the culture, philosophy, and people.
Past observations have shown it’s those criteria that drive the returns of the firm and thus the active manager. Secondly, costs are the best predictor on a forward-looking basis. Low cost funds tend to do better on average.
Finally, have the patience to stick with the inevitable ups and downs. In a study on active management, even the best outperforming managers had an average worst year of ten percent underperformance. Years like that simply come with the territory.
While no one can truly consistently beat the market, it’s still important to know what’s going on, including having an understanding of the frequent policy changes that come with a volatile political climate. While the economy has stabilized, don’t expect pre-crisis level returns. Although the “active vs. passive” debate has changed recently, it’s imperative you evaluate your financial objectives and goals to determine which strategy is right for you.
You can get your free ticket to the Wealth Summit here. There’s a lot of information from thirty or so speakers. Topics include building a triple-tax-free retirement account, strategies for maximizing your Social Security, ways to slash your lifetime taxes, asset protection strategies and more.