If there is one thing that has characterized the market over the last decade, it is a fundamental transition to passive investment strategies – bad or good, depending on your point of view.
One thing that is not controversial: passive investment strategies are now very popular.
There are a few figures that show the trend, but by some estimates the share of assets in passive funds today ranges from 33 to 47 percent – up from 13 to 24 percent in 2007.
The growth boils down to a number of factors: including the notion that transferring fees to an active manager if greater net income can be derived from tracking the index just doesn’t make sense.
The a growing number of “robo-consultants” are now on the market as algorithmic trading is becoming more popular, it shows.
But despite its popularity (and perhaps because of it), passive investing has its downsides.
Next week we will argue passive investing (and this is no less convincing), but let’s look at a few downside risks.
As always, content Star investing there is no investment recommendation.
6 Reasons Why Passive Driving Can Be Poor
1. You can’t beat the market if you’re set up to track the market
One of the cornerstones of the passive investment strategy is the purchase of shares of exchange-traded funds (ETFs).
They are a tool designed to track a specific stock basket, such as the ever-popular ASF-200 ETF, which includes the Blackrock iShares offering (ASX: IOZ).
For the long-term investor, tracking the ASX 200 would yield good profits – it has grown 72 percent over the past ten years.
But iShares hasn’t surpassed the index it tracks, for the simple reason that it’s not set up to outperform it – it’s created to track it.
2. You could miss other sectors
If you are not a diversified index trader, you will most likely lose sectors that can generate better returns over time.
As an example we will take ASX 200 – it is focused on banks and Miner. But you can see more value is created in biotechnology and health.
While the ASX 200 may have some health and biotech stocks (to be precise, 12), it is by its very nature losing the full weight of the sector.
3. Roba-stud
The appeal of passive management is that you don’t have to pay as much as management fees, which can ruin part of your profits.
This becomes doubly apparent with the growth of ETFs based on algorithmic trading (or robo-advisor).
It’s just an algorithm designed to track the index – and some market watchers are worried that algorithmic trading increases market volatility.
Many ETF investment options will have stop-loss orders embedded in math, so if the index it tracks falls below a certain level, it will immediately start selling to protect holders, which adds a minus.
Thus, downward (and upward) movements are more pronounced when a huge volume of purchase or sale orders fills the market – ultimately increasing volatility.
4. It’s hard to bet on the future if you track the index
Some of the more valuable deals are made as a result of creating a position in an unloved company or sector – only to have it rise in the future when the fundamentals become clear.
For example, if you bet on Facebook in 2015 at $ 78, today (at the time of writing) this investment would have been $ 170.
READ: Did the rage affect FAANG?
If you are tracking a broader technology market, you may have missed that growth. Meanwhile, junior resource exploration companies may offer opportunities to increase your initial investment.
But it is unlikely that you will earn a position in this company if you invest passively (unless you are in an ETF with small capital).
5. Passive investing can reward poor companies and punish good ones
The fact is that a lot of passive investments are that they are essentially set up to track a basket of products, whether they are in an index ETF or otherwise.
This means that companies that have been listed in a particular index are “attracted to themselves,” whether they deserve it or not.
For example, a gold company is selected to participate in a gold stock index. As the value of gold grows, so does the entire index, as one of the key triggers of buying in the algorithm is the price of gold.
What if a gold company is just a bad company – with poor cash management and disinterested advice? In this example, she is rewarded for simply being a gold company, not trading against its foundations.
The more traders set up to trade this way, the more pronounced this effect becomes, and the greater the reward a company with poor leadership receives.
6. It’s just not fun
Just giving the robot your money and relaxing and relaxing may ultimately be helpful, but where’s the mind? And where is the buzz?
Deep research of the company, acquaintance with its prospects and the projects on which it works, and accordingly investments causes sharp sensations.
Investing for many can be very emotional – investors are attached to companies and their goals. Go through the ups and downs and stick to it through the fat and the thin, ultimately hoping to be rewarded at the end of it all.
Yes, it is inherently more risky, but can also be much more beneficial.
Active investing opens up a whole new world of participation in your investment – and some people definitely like it.
Others may not see value in worries, but others see thrills in the value hunt – and that’s what you lose with passive investments.
This content is not advice on financial products. You should consider getting independent advice before making any financial decisions.
https://starinvesting.com.au/the-downside-of-passive-investing/?utm_source=rss&utm_medium=rss&utm_campaign=the-downside-of-passive-investing
