Is There Even Such A Thing As A Simple Passive Investment Strategy?

Firstly, let’s get started early with the obligatory Warren Buffett reference you always come across from any financial article in the media. (Hey at least I didn’t put it in the headline with a huge picture like most do). I consider a key driver behind the popularity of ETFs in recent times is due to media attention given to Warren Buffett’s Berkshire letter in 2013 that discussed a strategy for the trustee for his wife’s inheritance. It was to place 90% in a low fee US equities index fund and 10% into short term government bonds. The four years since has seen a large portion of active fund managers under-perform the S&P500, which has added to the popularity of such a simple approach. Then there is the publicity surrounding Buffett betting that an S&P500 index fund will beat hedge funds, for a second time now.

I wish to make it clear I am not necessarily arguing against this method. I just wanted to point out that using simple strategies such as this will only succeed if you have the temperament to stick with them. I may be feeling my age but I have noticed younger investors embracing such strategies. Overall it is good to see them taking an active interest in finance and I can understand why ETFs prove popular amongst them. For those investors that didn’t have much of their wealth in the markets in 2008, they must look at the underperformance of active managers and wonder why everyone doesn’t go down the passive route. They probably have a healthy dose of scepticism to paying fees, and technology has seen new innovations such as robo advisors appeal to many, removing a lot of the hassles and costs of investing.

In choosing a simple passive investing approach though, you have arguably made a complex active large investment bet. Let me explain.

On what basis for example, may you have chosen the approach described above? Perhaps because one of the greats of the investing world mentioned it? The strategy was based on the assumption that an investor wouldn’t unnecessarily fiddle with it, apart from disciplined rebalancing. To be confident you won’t chop and change with a strategy, you need a deeper understanding of the inherent risks in it in the first place.

Right now it seems so easy. Since the 1970s though there have been four occasions that would seriously test the nerves of those with this approach. Bear markets in the mid-1970s, 2000 and 2008 produced slumps of around 40-50% in the major US share market indices. In 1987 the stock market crash saw the market fall by almost a quarter in one session.

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