ITA Wealth Management

  • Home
  • Blog
  • Guest Registration
  • Lifetime Member
  • Forum
  • Reset Password
  • Contact Me
  • About Me
You are here: Home / Portfolio Management / Passive vs. Active / Index vs. Passive Investing

Index vs. Passive Investing

September 14, 2013 By Lowell Herr

Harold R. Evensky, in his Wealth Management: The Financial Advisor’s Guide to Investing and Managing Client Assets book, makes a distinction between index and passive investing.  Few readers are unaware of the differences between active and passive management, but the subtle definitions between index and passive management deserves some attention.

I subscribe to the principles of index investing even though I break the rules from time to time by adding an individual stock to a portfolio.  Any time a manager delves into stock picking, market timing, and excessive rebalancing, they move from passive to active investing.  To tell the truth, it is rare to find a truly passive money manager.  The one portfolio tracked here at ITA Wealth Management that falls into the passive management category is the Schrodinger Portfolio.  About the only trades made in the Schrodinger are related to rebalancing and reinvesting of dividends.  Those are not considered acts of active management.

All the ITA portfolios subscribe to the philosophy of index investing.  In other words, the portfolios are built around non-managed index ETFs.  In the future I may add a fundamental index ETF or two to a portfolio.  If I follow up on this idea I will tilt slightly towards active management.  To learn more about what fundamental ETFs are all about, read Robert D. Arnott’s book, The Fundamental Index.  If one uses fundamental index ETFs, the active management is left up to someone else so the active part is one step removed from the person tracking the portfolio.

This morning I was reading through the category of Passive vs. Active and realized there is a continuum in play between these two major investment philosophies.  The active investor is one who thinks they can apply skills of analysis to stock selection.  That analysis is superior to other smart people on the other side of the trade.  At least that is the idea.  Investors who think they have these skills need to carefully monitor their decisions with respect to an appropriate benchmark.  Let’s leave it at that.

The financial literature is replete with arguments favoring index investing over selecting individual stocks.  Neither does the literature support market timing or using models such as the ITA Risk Reduction or momentum investing.  We are testing these models and are test results will show whether we gain or lose ground with respect to the ITA Index and/or VTSMX benchmark.  There are limited studies that show some of these models work – at least over certain time frames.  Here at ITA I was using the ITARR model with the Kenilworth, Maxwell, Madison, Gauss, and Euclid portfolios, but more recently shifted to a modified version of the “Dynamic” plus SHY as explained in The Feynman Study.  Eventually I plan to move that material to this new website.  That leaves the Einstein, Bohr, Kepler, Curie, and Newton as portfolios to be passively managed with some judgments applied from time to time.  For example, the recent decision to simplify the Newton was an act of active management.  Within the Newton I am reducing the number of individual stock holdings and moving more toward a portfolio populated with index ETFs.  In the latest update I also applied some of the guidelines from the “Momentum” plus SHY model.  To keep abreast of what is going on, follow the explanations when a portfolio comes up for review every 33 days.

The recent addition of the “Rankings” tool has the possibility to aid IRA readers in lifting the Efficient Frontier (EF).  Is it possible to find a group of index ETFs, be they non-managed or fundamental, that creates an EF curve that overall moves toward the northwest of the Return vs. Volatility graph?  We are always trying to create portfolios that have the possibility of generating greater return with equal or lower volatility.  In a sense, this is active management, but not as aggressive as stock selection.  We are trying to improve our passive positions, an ongoing effort of any portfolio manager.

 

(Visited 150 times, 1 visits today)
facebookShare on Facebook
TwitterTweet
FollowFollow us
PinterestSave

Filed Under: Passive vs. Active Tagged With: Passive vs. Active Investing

Meta Data

  • Log in
  • Entries feed
  • Comments feed
  • WordPress.org

Search

Recent Posts

  • Looking Ahead To The Second Half of 2022 July 1, 2022
  • Carson Trio Review: 30 June 2022 June 30, 2022
  • Galileo Portfolio Review: 29 June 2022 June 29, 2022
  • Huygens Portfolio Review: 27 June 2022 June 27, 2022
  • Rutherford Portfolio Review (Tranche 2): 24 June 2022 June 26, 2022
  • Bullish Percent Indicators: 24 June 2022 June 25, 2022
  • Pauling Portfolio Review: 24 June 2022 June 24, 2022

Recent Comments

  • Lowell Herr on Huygens Portfolio Review: 27 June 2022
  • Lowell Herr on Bullish Percent Indicators: 17 June 2022
  • Lowell Herr on Kepler Portfolio Review: 17 June 2022
  • Lowell Herr on Bullish Percent Indicators: 10 June 2022
  • Lowell Herr on Bullish Percent Indicators: 10 June 2022
  • Mark Holbrook on Bullish Percent Indicators: 10 June 2022
  • Lowell Herr on Bullish Percent Indicators: 10 June 2022
  • Mark Holbrook on Bullish Percent Indicators: 10 June 2022
  • Lowell Herr on Bullish Percent Indicators: 20 May 2022
  • Lowell Herr on McClintock Portfolio Review: 10 June 2022

Users Online

10 Users Online
Users: 1 Guest, 9 Bots

Popular Posts

  • Hawking Portfolio Review – 1 April 2022
  • Investment Policy Statement: February 2022
  • How To Handle This Selloff: 18 May 2022
  • Rutherford Portfolio Review (Tranche 1): 8 April 2022
  • 2022 Guidelines for Relative Strength Portfolios
  • Kepler Portfolio Review: 15 March 2022
  • Hawking Portfolio Review – 1 March 2022
  • Schrodinger Portfolio Review: 4 February 2022
  • Using Volatility as a Diversifier and a Portfolio Hedge
  • Schrodinger Portfolio Review: 10 March 2022

General Investment News

Portfolios coming up for review are:  Huygens, Galileo, Carson Trio, and Einstein.  Non-scheduled portfolios may be reviewed.  If you are a new user, check the posts you missed. Links to Random Posts are found in the lower right-hand footer or just to the right of what you are now reading.  Most popular posts are found in the lower left-hand footer.

Check the Forum for more detailed information.  If you wish to begin a financial discussion, use the Forum.

Contact me at itawealth@comcast.net if interested in a Lifetime Membership.  Long-time Platinum members are now Lifetime members and this blog is free to all who signup as a Guest.  A few blogs are reserved for Lifetime members.

Random Posts

  • Franklin Portfolio Review: 22 June 2022
  • Darwin Portfolio Review: 18 February 2022
  • Millikan Portfolio Review: 20 December 2021
  • William Bernstein’s Latest E-Book: Getting Rich Slowly
  • Einstein Portfolio Review: 19 January 2022
  • Darwin Portfolio Review: 21 January 2022
  • Strategic Asset Allocation: A Starting Point For Portfolio Construction
  • Portfolio Performance Data: 14 August 2021
  • ITA Portfolio Performance Data: 24 December 2021
  • Bullish Percent Indicators: 31 December 2021
  • Why I Use ETFs Instead of Individual Stocks

Log in | Website Design by BOING