“Passive” Investing is a Big Lie

Bespoke has a nice post and some graphics on how things have changed since the S&P 500 price last visited the 1300 area, back in 2008.

People that are passionately committed to “passive” investing often have a hard time admitting/understanding that the S&P 500 is an active index.  It has massive survivor bias because S&P is constantly dropping laggards and adding strong stocks.  Passive investors often argue that they are buy-and-hold investors, when, in fact, the actual index return is plumped by all of the switches that S&P makes.  A true buy-and-hold investor that buys the actual underlying stocks and holds them generally loses money over time!  An earlier post that I wrote on this topic generated a ton of controversy, although Blackstar’s findings were echoed by DFA.  (There’s no end to the irony in this business!)

If the earlier post didn’t convince you that the S&P 500 is an active index, maybe the graphics from Bespoke will.  As they point out:

In fact, 11 of the 25 current S&P 500 members that have done the best since the last time the index was at 1,300 weren’t even in the index at the time.

Yep, nearly half of the big winners weren’t even in the index! Clearly, S&P is adding the flyers.  So much for passive investing.  Here are the nice tables from Bespoke with all of the gory details.

Source: Bespoke Investment Group

Now, obviously, we are big fans of active investing.  Thank goodness that S&P is constantly tinkering with the index to adapt it to current realities!  Buying strong stocks is what we do, so having S&P add them to the index is a nice thing.  (In fact, the list of big winners has substantial overlap with our portfolios–which we are quite happy about.)  Buying an S&P 500 index fund, then, is just selecting S&P as your investment manager.  If you choose S&P as your manager rather than Dorsey Wright or another active manager, that’s your call.  Just don’t kid yourself that buying an index fund is passive investing–it most certainly is not.

Disclosure: Dorsey, Wright Money Management currently has positions in F, WFMI, CTSH, AKAM, AAPL, BRCM, Q, GR, TDC, NFLX, FFIV, and CRM in various account styles.

2 Responses to “Passive” Investing is a Big Lie

  1. […] Почему пассивные инвестиции химера? Потому что сами индексы весьма активны! «Беспоук Инвестмент Груп» пишет: «Фактически, 11 из 25 текущих компонентов S&P 500, показавших лучшую доходность с момента когда индекс в последний раз был на 1,300 пунктах, даже не входили в индекс в то время.» Bespoke has a nice post and some graphics on how things have changed since the S&P 500 price last visited the 1300 area, back in 2008. People that are passionately committed to "passive" investing often have a hard time admitting/understanding that the S&P 500 is an active index.  It has massive survivor bias because S&P is constantly dropping laggards and adding strong stocks.  Passive investors often argue that they are buy-and-hold … Read More […]

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