Is Passive Investing 'Worse Than Marxism'?
A set-it-and-forget-it investing approach is certainly a pretty easy route for retirement savers to take, but it might be contributing to some big problems for portfolios, and even the market itself, down the line.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
Passive investing is taking over the world. Okay, that's an exaggeration, but investment researchers at Sanford C. Bernstein & Co. say that nearly half of equity assets in the United States are passively managed, and the trend is growing. These same researchers called passive investing "worse than Marxism."
What exactly is passive investing, and why is it a problem? According to Investopedia, "Passive investing is an investment strategy that aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum." Investors do this by purchasing index funds and exchange-traded funds (ETFs). So what's the problem?
Passive Investing Returns Fall Short
Index funds and ETFs have underperformed Standard & Poor's 500-stock index over the past two years, according to Steven Bregman, co-founder of Horizon Kinetics, an investment adviser firm with a "long-term, contrarian, fundamental value investment philosophy."
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Why? It could be simply the nature of these types of investments. When investors buy into an index fund, they're investing in a predetermined list of stocks. The managers of that index fund have to buy those stocks on the list without considering the valuation of those companies.
As Bregman says, the rise of passive investing "allows the herd to crowd assets and escalate their power without accountability to fundamentals." Does this sound a like a good idea?
A Factor in Bubbles and Flash Crashes
Worse yet, the rise of passive investing may be creating one of the biggest bubbles ever. A bubble can be defined as a situation where money flows in a certain direction without the movement being based on a valuation, which also seems to be one of the defining features of passive investing.
And there's another issue: Computers run index funds and ETFs. The computers buy whenever there's a dip. Those same computers sell when the trend turns the other way, and that can create an irrational panic where even more people sell. Remember the Flash Crash of May 6, 2010? That day the S&P 500 fell 7% in less than 15 minutes. This plunge was partly caused by computers selling off ETFs and index funds. Imagine the bubble—and the crash—if people continue to pour money into passive investing.
The Bottom Line for Investors
Passive investing has its champions. Index funds and ETFs can be low-cost, easy-to-buy, and well, passive—investors don't have to do anything more once they've bought in. But passive investing can also carry danger for individual investors, and maybe more importantly, for the market as a whole.
What Should You Do About It?
Be an active passive investor. Meaning that you should have a stop loss strategy for your equity holdings to protect against large losses when the inevitable bear market comes.
Also, don't forget to rebalance your portfolio quarterly so as to not become overweighted in one sector or index, which can increase your risk.
-
Over 65? Here's What the New $6K 'Senior Deduction' Means for Medicare IRMAA CostsTax Breaks A new deduction for people over age 65 has some thinking about Medicare premiums and MAGI strategy.
-
U.S. Congress to End Emergency Tax Bill Over $6,000 Senior Deduction and Tip, Overtime Tax Breaks in D.C.Tax Law Here's how taxpayers can amend their already-filed income tax returns amid a potentially looming legal battle on Capitol Hill.
-
5 Investing Rules You Can Steal From MillennialsMillennials are reshaping the investing landscape. See how the tech-savvy generation is approaching capital markets – and the strategies you can take from them.
-
When Estate Plans Don't Include Tax Plans, All Bets Are Off: 2 Financial Advisers Explain WhyEstate plans aren't as effective as they can be if tax plans are considered separately. Here's what you stand to gain when the two strategies are aligned.
-
Counting on Real Estate to Fund Your Retirement? Avoid These 3 Costly MistakesThe keys to successful real estate planning for retirees: Stop thinking of property income as a reliable paycheck, start planning for tax consequences and structure your assets early to maintain flexibility.
-
I'm a Financial Planner: These Small Money Habits Stick (and Now Is the Perfect Time to Adopt Them)February gets a bad rap for being the month when resolutions fade — in fact, it's the perfect time to reset and focus on small changes that actually pay off.
-
Nasdaq Leads a Rocky Risk-On Rally: Stock Market TodayAnother worrying bout of late-session weakness couldn't take down the main equity indexes on Wednesday.
-
Social Security Break-Even Math Is Helpful, But Don't Let It Dictate When You'll FileYour Social Security break-even age tells you how long you'd need to live for delaying to pay off, but shouldn't be the sole basis for deciding when to claim.
-
I'm an Opportunity Zone Pro: This Is How to Deliver Roth-Like Tax-Free Growth (Without Contribution Limits)Investors who combine Roth IRAs, the gold standard of tax-free savings, with qualified opportunity funds could enjoy decades of tax-free growth.
-
One of the Most Powerful Wealth-Building Moves a Woman Can Make: A Midcareer PivotIf it feels like you can't sustain what you're doing for the next 20 years, it's time for an honest look at what's draining you and what energizes you.
-
Stocks Make More Big Up and Down Moves: Stock Market TodayThe impact of revolutionary technology has replaced world-changing trade policy as the major variable for markets, with mixed results for sectors and stocks.
