The passive investment in indices came to stay and in this post show better.
First, keep in mind that not always an ETF follows an index, nowadays the ETF has become fashionable and even used to make a trade, as well as ETFs of specific sectors or products, sectors, fashions and specific trends. There is even the reverse, etf of “short”, etf of commodities and so on. Also, know that even if an ETF is supposed to follow an “index” this “index” can be considered an “index” in fact.
For example, an ETF that follows the “index” of Brazil’s financial sector is not really an index ETF, but rather a sector ETF. When I refer to the index ETF keep in mind an ETF of a complete market, and the higher the better.
I would say that for Buy and Hold (you and me) there are THREE ways to invest.
1 – Buy a passive market index eg: VTI or PIBB11.
2 – Buying quotas of active funds (managed by professionals).
3 – Assemble your personal portfolio of stocks and go studying, buying, analyzing and eventually selling some company that no longer meets your criteria.
The form number 1 is the most passive, cheap, plodding, emotionless and winning. (Index funds)
The number 2 form is the most expensive (much more expensive), has a sophisticated look and a mediocre or even bad return (overwhelmingly). (Active investing by professionals)
The number 3 form is the most sophisticated, needs monitoring and study, knowledge, spending precious time, can be potentially profitable, mediocre or even lousy if you do not know what you are doing VERY well. (Active investing by amateurs)
I’m logically pulling the ember for the sardine of the passive indices, of course, there are Peter Lynch, Buffet, Luis Sthulberg and the Green fund in Brazil to tell me that’s not quite the way it is. There are also individual anonymous winners out there, but it’s hard enough to find these people and put them in a study.
I’m not going to focus on the exceptions, I’m going to focus on the average, and even a bit beyond the average, the exceptions of active investing go just beyond the final 5% of the Gaussian curve.
Since John Bogle founded Vanguard and became the villain on Wall Street, that debate exists. There are already almost decades of debate and we already have many results on hand to launch the dispute. Now, since this post is not just about “I think that I know”, but about what the facts say, let’s face it.
One of the secrets of the winning strategy of passive investment is the cost efficiency and the low rates of administration. The money from investors who buy index funds will buy and follow all stocks of an index, at a low cost, and rarely selling companies (which avoids capital gain tax), in the same way, the passive ETF with little Or zero yield is not taxed in the American lion IR (in Brazil dividends are “tax free” but the total tax burden on companies is higher than outside – subject for another post).
The image below shows the percentage of active funds that were hit by the index, active stock funds are blue, orange funds active with high yield corporate bonds and gray active reits funds.
If you want to be a little broader see the last bars on the right:
83% of active stock funds were hit by the 2006-15 market.
94% of bond funds were hit by the 2006-15 market.
86% of active reits funds were hit by the 2006-15 market.
We know that the period analyzed is small (and it is), but large historical series have the same consistent result (in favor of investment in the index).
But the active fund industry is still the largest and most profitable, the tireless work of advertising, pampering and heavy marketing still holds the fattest share of the market. These active funds hold 60% of the financial volume in the US, and the passive funds hold 40%. Now look what has happened in recent years:
As you can see, the staff is taking money from the active funds and buying the passive funds. And it has grown a lot in the last five years as the figure shows:
And I also continue to show the median returns of all stock funds vs. passive funds, see the return on the last bar on the right, the liability remained at 7.41% (annualized) for the period 2006-15 while the asset stood at 6.2%, that is, the passive fund was 1.21% higher in ALL YEARS from 2006-15.
Source: S & P
And if you think the thing is so there in the US only, that some managers from other countries can beat the indexes of other markets, there goes the image.
Source: S & P
The number in red shows the percentage of managers who failed to hit the market itself. Considering the Emerging Markets the thing is so ugly that 54% or more that half of the managers simply could not beat the market, had a worse result.
Now I will put here the words of Damodaran (which I based myself on making this post):
“Suffice to say, no matter what the reasons, active investing, as structured today, is an awful business, with little to show for all the resources that are poured into it. In fact, given how much value is destroyed in this business, the surprise is not that passive investing has encroached on its territory but that active investing stays standing as a viable business.”
And now especially on the special investors, still in the words of the Damodaran:
No subgroup of investors seems to be competent to beat the market. Under no type of investment philosophy (and not even Damodaran’s, according to himself).
“The standard defense that most active investors would offer to the critique that they collectively underperform the market is that the collective includes a lot of sub-standard active investors. I have spent a lifetime talking to active investors who contend that the group (hedge funds, value investors, Buffett followers) that they belong to is not part of the collective and that it is the other, less enlightened groups that are responsible for the sorry state of active investing. In fact, they are quick to point to evidence often unearthed by academics looking at past data that stocks with specific characteristics (low PE, low Price to book, high dividend yield or price/earnings momentum) have beaten the market (by generating returns higher than what you would expect on a risk-adjusted basis). Even if you conclude that these findings are right, and they are debatable, you cannot use them to defend active investing, since you can create passive investing vehicles (index funds of just low PE stocks or PBV stocks) that will deliver those excess returns at minimal costs. The question then becomes whether active investing with any investment style beats a passive counterpart with the same style.”
Now let’s go to what I’ve gotten me more attention in particular. It’s not the numbers, it’s not the percentages, it’s just something I’ve been thinking lately: the cost of your time studying, analyzing, buying, selling, reading reports, etc … from companies …
I confess that when I started in bovespa three years ago I was slow to sleep, thinking where I’m going to contribute if I put 3,000 in that or 5,000 in that, or the 8,000 that I had in that other company. When I made the contribution that updated the Bastter System I was already beginning to think about the next month, and this whole thing sometimes consumes our time a lot and have to know how to deal with it, even because it is a whole new world, which can Generate a lot of worries and a certain anxiety, and each one knows himself and knows how far he squeezes the callus. All these hours disrupting your sleep, preventing you from staying with family or girlfriend, or seeing serial or at the gym … just to hit the head with the market looking for a little oportunity or wanting to earn a little more.
If it were to quantify these lost hours, how many reals would it cost? R $ 15 reais an hour? R $ 20 reais an hour? By the way, how much is the time of your day? Considering the hours of work and the rest? Our life is measured in time, and it costs money. Even the hours of leisure have a cost (not to earn money or even to rest in fact). The real deal is: How worthwhile investing hours and hours into it? Thinking about these investing things, on finances in general? Reading blogs? Finance books? It’s okay that you have to know the basics and the basics, and that’s it, but it’s really just that, it has to be simple, because life is too complicated, and there are other better things to do.
The amateur investor has fantasies that he is a good investor and even more when he starts to think he knows something, thinks he will get a low price here, a PL down there, a P / VPA down there, thinks he will see something Nobody saw it and goes there to buy a good valuation (very ridiculous for the money he has in the account of the brokerage house) and this is not always or almost always will not even be a real gain in fact.
So in fact, the post was an invitation to reflection, about time, about returns, about the investment of your personal time and your mental energy expenditure in the whole process. Is not it worth it to settle for the return of the market and go do something cooler?
Now there is the other side, the hobby and the joy of those who really like being a stocker picker or a manager of their own wallet, rejoices and EVEN cheers on it. Maybe it can be your case, everyone has their way of investing, I think you have to find what suits you and follow him. There are very good people in stocks here, in real estate funds and etc … (in RF, do not wait there …) and who like to know more deeply and to accumulate more knowledge and that DE FATO get very excited about it in a healthy way.
The conclusions I have reached, ending the year 2016 are FOR ME.
Fixed Income is Treasury Direct.
Stocks: It is possible to maintain and monitor a portfolio of 15-20 companies expecting good returns, in the long run, studying the basics of fundamentalist analysis (above FI, CDI, Brazilian market and obvious inflation).
REITS: Being no more than 15% of its total portfolio in Brazil and with a 15-20, preference for bigger and more diversified multi-all (follows the BS without price or look for diamond, and stay in peace, who is good today Worse tomorrow and vice versa)
Passive and gigantic accumulation ETFs based in Ireland, such as SWDA, CSPX, CPXJ.
Diversify little in ETFs and REITs bond (no more than 20% of the world ‘s total portfolio), preferably with low or zero yield and very low rate fee.
It may seem a little or a lot to you, but this basicão there already gives at least 50 assets. It’s a lot to worry about, then you’ll see how. I’m already used.
IT IS NOT AND IT WAS NOT RECOMMENDATION OF PURCHASE.