When It’s “Cool” to be Passive
BY SHARI GRECO REICHES
If you know me, you know that I've never been a passive person. Go ahead and say it! Shari Greco Reiches is as Type A as they come. My family is not passive. They speak their minds on just about everything. Have you met my kids? My friends are not passive people either – and you know who you are.
Hey, us Type A folks just know how to get stuff done. No shame.
So, if I am anything but a passive person, how on Earth did I end up as a passive investor?
I’ll explain. But first, here’s an easy way to look at passive investing, and its active-alter-ego:
- Active investing: Trying to find the needle in the haystack – picking the winning stocks that you hope will “beat” the market.
- Passive investing: Own the whole haystack instead. Use funds that own all the stocks in the market, and whose performance matches that of the market. Index funds!
So why do I put my Type A personality on the shelf when it comes to investing? Ha, it’s easy, us Type A’s love to win!
Let me share a study by Dimensional Fund Advisors to highlight my point.
U.S. Domiciled Mutual Funds. Source: Mutual Fund Landscape 2019, Dimensional Fund Advisors. Past performance is no guarantee of future results.
It’s really, really hard to beat the market. Over the time shown, only 18% of actively managed stock mutual funds beat their benchmark (“the market”). Nice job, brightest minds on Wall Street! I’ll take the other side, the 82% of the time that a passive investing strategy wins.
Surprised by these results? You’re not alone. So are many of our clients when we introduce them to our passive approach.
But wait, there’s more!
Passive investing costs less than active investing. It’s cheaper, because you don’t need to pay all of those analysts and researchers. So, passive investing has a head start already.
Passive investing is also more tax-efficient. Your active mutual fund is constantly buying and selling, running up lots of capital gains. And you know what is the WOAT? Losing money in an active fund and then getting hit with a 1099 tax form that has large capital gains!
Passive investing is less complex and more predictable. You get the returns that the market provides. That’s helpful if you are trying to stick to a financial plan that is based on an expected return.
You add it all up, and a passive approach is less stressful than an active approach.
The next step comes when you are considering which passive index funds to own. The funds need to be part of a mix tailored to your specific circumstances and plan. Of course, that’s exactly where a terrific financial advisor with a proven record of success comes in.
They might even be Type A. Call me, I’ll help you find her.