Our philosophies dictate our thinking, strategies and action. Weak or flawed philosophies lead to actions that thwart our ability to live well and care for our concerns. We have philosophies for how we care for our marriages, our parenting, our careers, our health, and our investments. When we do not examine our philosophies, we are often blindsided with future failures or breakdowns in living the life we want.
In investing, there are only two fundamental philosophies: Active versus Passive Investing. Due to the devastating negative impacts of Active Investing on investors’ ability to growth wealth, FHWA utilizes Passive Investing practices and strategies.
Active vs. Passive Investing
|
Active |
Passive |
| Return Objective |
Beat a market |
Obtain the return of a Market index or asset class |
| Style Definition |
40% drift from classification |
Pure & consistent classification |
| Average equity individual investor returns over 20 years |
3.83% per year according to Tao bar study for 20 year period ending 2010 |
S&P 500 index = 9.14%, globally diversified equity portfolio= 11.7% for 20 year period ending 2010 |
| Approach |
Stockpicking, market timing, track record investing, or style drifting |
Buy, hold, and rebalance a globally diversified portfolio of index funds |
| Taxes |
High taxes – about 20 to 40% of return over 10 years |
Low taxes – about 10% of return over 10 years |
| Portfolio Turnover |
Turnover of about 80% in 2010 |
Turnover of about 10% in 2010 |
| Individual Investors |
75% of equity funds |
25% and growing |
| Institutional Investors |
60% of domestic stock assets |
Currently about 40% |
| Proponents |
Virtually all Brokerage Firms, Mutual Fund Companies, Market Timing Services, Investment Press and Brokerage Training Programs |
University of Chicago, Nobel Prize recipients, Vanguard group, dimensional fund advisors, Barclays global investors, Warren Buffett, David Swenson, and Charles Schwab |
| Analytical Techniques |
Art – Qualitative, Disregard for Risk, Forecasting, Predicting the Future, Feelings, Intuition, Luck, Betting, Gambling, and Speculation |
Science – Quantitative, Risk Management, Long-Term Statistical Analysis, Accurate Performance Measurements, Evidence-based |
| State of Mind |
Stressed |
Relaxed |
"While it is a tragedy that the vast majority of investors unnecessarily miss out on the market returns that are available to anyone by adopting a passive investment strategy, the really great tragedy in life is that they also miss out on the important things in life in pursuit of the "Holy Grail of Outperformance." - Larry Swedrow – "Wise Investing Made Simple"
"..the best way to own common stocks is through an index fund..." - Warren Buffett, Berkshire Hathaway, Inc. 1996 Shareholder Letter
“By day we write about ‘Six Funds to Buy NOW!’… By night, we invest in sensible index funds. Unfortunately, pro-index fund stories don’t sell magazines.” - Anonymous - Fortune Magazine Writer
“The statistical evidence proving stock index funds outperform between 80% and 90% of actively managed equity funds is so overwhelming that it takes enormously expensive advertising campaigns to obscure the truth from investors.” - The Motley Fool - Internet Advisor
“I believe the search for top-performing stock funds is an intellectually discredited exercise that will come to be viewed as one of the great financial follies of the late 20th century. Ignore market timers, Wall Street strategists, technical analysts, and bozo journalists who make market predictions … Admit to your therapist that you can’t beat the market.” - Jonathan Clements - Columnist, Wall Street Journal
“When it comes down to how we are performing, we are trailing in the market’s wake. People ought to recognize that the average fund can never outperform the market in total.” - John Fossel - Former Chairman, The Oppenheimer Funds
"If I have noticed anything over these sixty years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market." - Benjamin Graham– Legendary investor and author, Security Analysis
“ After nearly fifty years in this business, I do not know of anybody who has done it (market timing) successfully, and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.” - John C. Bogle, SR. - Former Chairman & Founder, The Vanguard Group
“I have a lot of friends who work in the securities business, and all of them just buy the stock market. I don’t know any of them who are stock pickers.” - Benjamin Stein- TV host of Win Ben Stein’s Money, SmartMoney
"Most of the mutual fund investments I have are index funds..." - Charles R. Schwab, Author, Guide to Financial
“All the time and effort people devote to picking the right fund, the hot hand, the great manager, have in most cases, led to no advantage. Most investors would be better off in an index fund.” - Peter Lynch - Legendary Manager of Fidelity Magellan
"The best throw of the dice is to throw them away." -English Proverb
"...Despite all the hoopla surrounding the fund performance surveys, empirical evidence casts strong doubt on the naïve application of past performance to the selection of investment managers." - William Sharpe, et al, Investments (2nd ed.)
