Passive vs. Active Investing: Will We Ever Learn?

New Reader? Get free regular updates from Can I Retire Yet? on saving, investing, retiring, and retirement income. New articles weekly. Join more than 18,000 subscribers. Unsubscribe at any time:

Did you monitor the political and economic news of the past year with unease? Did you make any changes to your investments in response, or wish you had — or hadn’t?

As much as I follow passive index investing, there are still vestiges of earlier philosophies in my portfolio. And the temptations to diverge from this philosophy are plentiful. Occasionally, I need reminding…

Last summer, for example. Remember when Standard & Poors downgraded the U.S. credit rating, and the President and Congress were playing chicken over the national debt ceiling?

Remember how obvious it was that the U.S. economy was doomed and that anybody with any sense would diversify somewhere else more politically and financially stable? Like Asia, or emerging markets, or Europe perhaps…

Well I’m not completely immune to temptations for opportunistic rebalancing. But I’ve developed a survival strategy over the years that has prevented major blunders: When I’m absolutely convinced there has been a shift in the world, or myself, that requires a different asset allocation, I’ll make a very small move, on the order of 1% of my assets. That way I feel like I’ve taken action, but I buy some time to either confirm my initial conclusions, or return to my senses.

So last summer I made a small 1% move in my retirement account (no tax implications) from Vanguard’s Intermediate Term Treasury Fund to their FTSE All-World ex-US Index Fund. I rationalized it as just another step in a long term trend of diversifying my holdings outside of the U.S.…

Well, maybe I got the first half of that trade right: Treasuries have fallen slightly since. However, shortly after my transaction, the bad news out of Europe and Greece intensified, and went on for months. The FTSE international fund plunged and is still recovering. In the short term, at least, Europe turned out to be much worse off than the U.S.!

I can laugh about this now, because my 1% move was largely symbolic. And these are long-term investments I won’t need to tap for a decade or more. But I spent time and money on something I should have simply left alone, instead of reacting to the news. Live and learn, and learn again.

On the other hand, I DID get it right in my taxable account: I recently opened my 1099, and confirmed that I had NO transactions for the entire year. That’s right, the Realized Gain or Loss section of the form is completely blank! So, yes, it’s possible to be a serious investor and go a full year without a single trade in one of your major accounts.

Navigating the stock market successfully is like extricating yourself from a Chinese finger trap, or escaping from quicksand: panicky reaction is counterproductive, sometimes deadly. Slow, steady, methodical progress is your best chance for survival.

Have you learned, or re-learned, any investing lessons recently?


  1. Alpha Seek says

    If I were to have followed the passive investing methodology advocated what would my average annual return have been for the past six years?

  2. Darrow Kirkpatrick says

    It would depend on your asset allocation and the specific investments you chose. As one simple example, the Vanguard Balanced Index Fund (VBINX: 60% stocks/40% bonds), returned about 4.2% over the last 5 years, according to Vanguard's web site.

    I do recommend passive index investing, but I can't recommend an individual asset allocation or investments for people. However I'm working to put out more information here to help individuals make those decisions on their own.

    Thanks for the question Alpha Seek!

  3. Some time back we did a post on advantages of doing NOTHING in stocks markets. Though you do need to take the first step by picking up quality stocks.
    But it seems it is very hard for people to understand that investing can be very simple (But definitely not easy) in the the long run.
    Our take, similar to yours can be found at –

  4. Darrow Kirkpatrick says

    Thanks, I'm a fan of doing nothing,when possible. Interesting post, though I had difficulty understanding what was the "long term average" baseline being compared against. Anyway, I liked the goalkeeper analogy.