I’m busy moving servers this week so I dug into my Evernote archives for help. You can find a passive versus active investing article on every single investing site ever. If you don’t, then they probably forgot, or have one on standby for situations just like mine. Anyways, the analogy I use isn’t perfect but it gets my point across. Enjoy.
First, I’ll make this perfectly clear. I’ve never been a fan of arguing passive vs active. It’s a joke and a terrible waste of time on the level of trying to convince a die-hard Republican to vote Democrat. Pushing against a brick wall isn’t fun.
The argument for passive investing reminds me of buying a house and doing nothing with it for 30+ years. It’s a terrible argument. Who would do that? After 30 years untouched, what type of shape would it be in? I’m sure the paint would peel, the roof would leak, basement walls would crack, and a sump pump would die. Water damage and a dozen other problems would exist if it was still standing. And all due to a stubborn passive homeowner.
Now imagine that home was your retirement account untouched for 30+ years. Sure it would still be there. But what shape would it be in? How many cracks and leaks would exists? How much work would it need before you move into retirement?
In both cases maintenance is a necessity – for keeping that home standing and your retirement account in shape. Maintenance requires work, either by you or someone you pay. Hardly a passive endeavor.
Now, don’t confuse this with a need to be an overactive investor. How much work needs to go into maintaining a home?
Maybe you divide it into projects over time, replace the carpet one year and paint the house the next, while dealing with emergencies as they pop up. If you want your home to retain its value, while appreciating over time, you don’t need a new roof every month, or every year, but you do need to replace it from time to time.
Arguments can be made that both ends of the spectrum work well when done right and work horribly when done wrong. And most people should start (and stay) in the less active end. But there will always be some people who can turn a little extra work into a higher valued home over time.
Simply, everyone is an active investor, some less active than others. Might I remind you, there are risks to a sedentary life.
- Retirees, Here’s How to Rebalance Your Portfolio – CNBC
- Seth Klarman: What I’ve learned from Warren Buffett – S. Klarman
- Don’t Be Afraid to Stand Apart From the Herd – C. Richards
- You Have No Idea What Happened – New Yorker
- Breaking With Bogle – B. Ritholtz
- It’s Your Fault – M. Housel
- It’s Hard To Top Traditional Diversification – ServoWealth
- Why Every Investor Should Own REITs – C. Sizemore
- Activist Funds: An Investor Calls – Economist
- GMO Quarterly Letter (PDF) – GMO