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Can passive investment become as attractive as active management?

March 8th 2016

Humans have always been seeking to find the most profitable, accessible and easily handled approach to invest their assets. Non-professional investors usually want to see themselves as active and dynamic, believing that they are able to time the ideal market reactions even though they lack sufficient knowledge. Private investors have in some cases found the burden of risk to be too great to be handled on their own and tend to lay the responsibility in the hands of professionals, assuming their returns after commissions will be greater.

The human bias is that we want to imagine ourselves as active and exceptional, which leads us to make bad investment decisions . The idea of passive investing has never been perceived as attractive, but the truth is that passive investments in the US Stock market have produced attractive returns over the last century, far greater than what the average active non-professional investor has been able to achieve. The lacking returns of the average active non-professional investor are due to the hefty fees charged by the financial sector and poor self-made investment decisions that originate from our cognitive human biases and expectations.

Finance legend Victor Haghani, former co-founder of LTCM, is amongst the experts that now consider the solution is to combine the simplicity, transparency and low fees of passive investing with active market actions, using active index investing as an evolution of modern portfolio theory. He recently described this approach at TEDx, with a powerful talk titled “Where are all the billionaires and why should we care”.

Victor Haghani’s ELM Partners currently have $400 million assets under management and they offer their services to clients with a minimum investment of $300,000. Our approach and company (ETFmatic Ltd) is not endorsed by ELM Funds or Victor Haghani, nor do we specifically endorse theirs, but we do believe most investors can learn a lot from this talk.