Sunday, February 16, 2014

Are we spending too much time doing active investing?

The More Important Game of LifeWhile the evidence is overwhelming that passive investing is the winning investment strategy, it's also the winning strategy in the far more important game of life. Here's why.
As a passive investor, when I come home from my busy day, I get to sit down with a glass of wine and ask my wife about her day and how my kids and grandchildren are doing. Because I didn't spend my time trying to beat the market, I also got to coach my youngest daughter's softball, soccer and basketball teams. I also read 50 to 70 books each year, do community service, play tennis, and focus on the other really important things in my life.
Investors following an active management strategy spend much of their precious leisure time watching the latest business news, studying the latest charts, reading financial trade publications, and so on. Even if they are among the few who are successful at the active management game of generating alpha (performance above risk-adjusted benchmarks), the "price" of success may have been that they lost the far more important game of life.
The question for you to consider is what are the important things in your life? Is it trying to generate extra returns through active management strategies that require you to "invest" large amounts of your time? Or are the important things in your life time spent with your loved ones, on your faith, your education, your dreams, a worthy cause, teaching or mentoring others? If you don't already know the answer, perhaps this story will help you find it.


Kyith said...

there is no hard and fast rule here, but generally passive investing helps because the maintenance time allocation to make it work is far less than active.

but in all things its difficult for singaporean's to achieve it due to that the main reason why it works is absent for the singaporean: low cost

Wealth Journey said...

That's a valid point about the cost. I'm sure it will get better with the competition of so many overseas discount brokerage in singapore.

We can actually get access to overseas ETFs thru' the discount brokerage. The key issue for me is the estate duty imposed which make me hesitate to invest a bulk of the portfolio overseas. Some say we can mitigate this with a term insurance matching the percentage of portfolio that needs to be taxed.

In any case, it is just a thought as I find active investing takes up too much time and mental capacity for a portfolio that is quite large. I am like a full-time fundmanager. I rather prefer to go passive and have more time to focus on other income producing activities as well as more time for the family.

What about you ? Are you considering the switch to a passive portfolio? or you still enjoy uncovering hidden gems :)

Kyith said...

where are my manners. happy CNY to you.

i can't get off hunting for gems but its been more difficult as time passes due to things that need me to attend.

but i lament how difficult it is for folks to form a nice low cost portfolio.

i compile this table not too long ago on different ways to go about forming something like that.

essentially u can ignore the behavorial gap, which is really the cost of our brain playing tricks on us.

i tend to tell the young ones who have not venture you can split it between 50% passive and 50% active. at least u know that 50% is not gonna veered very far off.

estate duty as you highlight is a real problem, and we hope singapore has more solution. short of writing in to Tharman to push for real change.

Canada do not have estate duty. UK has but its still a managable amount, and its climbing (still i think your networth will easily burst this haha)

The other idea is to have joint accounts or a term insurance for the amount that it will grow towards.

hyom hyom said...

This is a thought-provoking post. Thanks, Wealth Journey.

Those who have been actively managing their own funds should honestly look back on their past performance(hopefully, they keep a trading journal) and see if they beat the passive alternatives. It does not sound smart to work hard if a person can shake leg and earn more money than if he sweats it out and sacrifice time for his loved ones.

It is a different matter for those who have a passion for investing. The "opportunity cost" becomes entertainment expense.

Hi Wealth Journey,

I do invest overseas through a a US discount broker. The estate tax in US was a turn-off. As you already know, buying term insurance was one hedge. Another hedge I did was to create a joint account with my wife. In addition, I bought extra term insurance for her in case both of us die together in an accident to protect the children and parents. If you are married, you may consider doing the same thing with your husband. For singles, I think they can still create a joint account with their parents or loved ones.

Another consideration regarding ETFs in US is the 30% withholding dividend tax on Singaporeans. If you rely substantially on passive income from dividends, this is a big minus.

Have a nice day!