“The Focus on Active/Passive Is a Distraction”

There’s good stuff going on at the Vanguard Diehards board lately. Petrocelli offers us a dose of The Common Sense That May Not Be Spoken when he says: “My conclusion after all these years is this: the focus on active/passive is a distraction. The focus should be on buying low-cost funds and diversifying. That’s all. The active/passive distinction can make for some fine pissing contests, but it doesn’t really accomplish a lot in the end.”

That’s good stuff.

I see Passive Investing as the Devil With a Blue Dress On of InvestoWorld. I say “don’t even start up a conversation, you’ll end up in the gutter with a bottle in your hand.” But Passive Investing didn’t get to be so popular just by being evil. There’s got to be some serious good in there or there wouldn’t be so many smart people who have fallen for it. Petro is pointing us to two of the obvious good points when he notes that those who push Passive argue for diversification and for keeping costs down. The other obvious good is that those who push Passive push sticking with a plan for the long term. Those three goods are a very big three goods.

That’s the blue dress part. I believe that God put me on earth to warn you about the devil part. So we better get to that.

Petro is proposing a non-dogmatic approach to Passive Investing. That makes sense. Apply the principles of Passive Investing in a non-dogmatic way and you can enjoy the three goods without falling into the pit. Where I might take issue with Petro a bit is re his possibly too glib suggestion that there are a good number of investors who can pull this off in the real world.

Delete the dogmatic from Passive Investing and you’ve got the one you’ll be proud to bring home to meet your parents. But what are the odds of getting Ms. Passive to go along? Is the Petro vision a fantasy?

I think the Petro vision can be realized. But I think we need to think it through a bit to make it happen.

You can avoid becoming dogmatic about Passive Investing by knowing its limitations. I think that’s the key. In order to make Passive Investing work out in the real world, you need to go in with a peaceful easy feeling, with both feet planted firmly on the ground.

Passive is dangerous in its suggestion that it is okay or acceptable or (heaven help us all!) even a good thing to stick with the same stock allocation when prices go through wild swings. Petro doesn’t care about that rule. He’s a practical guy. He wants what works. So I don’t think he would be opposed to the idea of people hearing why it’s critical that they lower their stock allocations when prices get to the sorts of levels that apply today. So Petro’s vision can work.

People need to be told about the realities, though. We’re born with evil hearts. We all feel temptations to buy into Get Rich Quick schemes. We all possess a desire to hurt ourselves, and unless we are warned about it in no uncertain terms, we will bite into the apple. We need all this stuff spelled out.

We need articles warning us of the dangers of failing to make adjustments in our stock allocations when price changes require it. We need calculators using the historical data to prove the point. All that good stuff. With all that good stuff, I think we can make some changes in the conventional approach to Passive to make it a workable investing strategy.

A generally Passive approach can work. A reformed Passive approach can work. A non-dogmatic Passive approach can work. A valuation-informed Passive approach can work.

A fellow named “Heaths” zeroes in on the good side of Passive a few posts later when he asks: “it seems that you agree that the degree of active is important and more than a distraction. Is that right?” Yes, that’s right. Investors should aim to limit the number of allocation changes they make. And beginning investors should limit the extent to which they engage in stock picking. Those Passive rules are good rules. it is the dogmatic jive talk of The True Believers that causes all the trouble.

Heaths focuses in on an extremely important point a bit later on. He says: “Most investors do not have the skill and/or temperament to actively invest, except perhaps in very modest ways. Because of this most should follow the basic tenets of passive investing: low cost, diversification, and stay-the-course. Some modest active investing might be desirable provided the investor fully understands all of the pros and cons of his investment decisions, but when in doubt most should err toward the passive.”

That’s stated reasonably. It’s not the crazy dogmatism that has made such a mess of so many of our boards over the past six years.

I don’t entirely agree with Heaths, however. I agree that there are important goods in the Passive model and that all investors should be taught about them. I don’t agree that we are not capable of knowing when we need to make changes in our stock allocations, however. All of us have experience paying attention to price when we buy cars and houses and bananas. I am highly skeptical of the claim that we are not capable of doing the same when buying stocks.

It’s true, though, that most of us do not possess this ability today. Heaths nails the current state of play.

You know why? It’s because nobody talks about these realities! When was the last time you heard Bogle give a speech telling us how to know when prices have reached a point where we need to lower our stock allocations? Or Bernstein? Or Burns? Or whoever?

When the Big Shots get down to the business of telling us what we need to know, we will listen. And we will learn. It’s not that we can’t do it right. It’s that the “experts” are so afraid of talking straight about this stuff that they never give us a chance to take the good stuff in.

I know whereof I speak. I have been talking about the effects of valuations on long-term returns on a daily basis for over six years now. Thousands of community members have either expressed gratitude or expressed a desire to learn more. These are ordinary people. These are Normals. These are “most investors.”

We are perfectly capable of learning. What we need today are some “experts” possessing the courage to get about the business of doing some honest and informed and non-dogmatic teaching.

Good job, Petro! Good job, Heaths! Let’s see more of the same!

Today’s Passion: The non-dogmatic Passive Investor is free to do all sorts of things that the dogmatic type dare not even think about. He can pick stocks! No, really. Read all about it in the article entitled Stock Picking for Indexers. Please don’t let any friends of Mel Lindauer know that I wrote that one. I’m in enough trouble as it is.

Comments

  1. Anonymous says

    I had not seen the Vanguard Diehard’s Board and the interesting conversation there. Thanks for pointing me to it. It looks like a good board to participate in. Why don’t you post this material there?

  2. Rob says

    Honest posting both on safe withdrawal rates and on the effect of valuations on long-term returns in general has been banned at the Vanguard Diehards board, Anonymous.

    I noted in the blog entry that things are looking up there. The majority of members of that board community has of course always favored the idea of permitting honest posting (and the published rules for the site of course reflects this preference). For some time now posters there have been trying to get the most abusive posters removed. There is a group of highly abusive posters that usually posts at the Bogleheads.com board that runs over to the Vanguard Diehards board to disrupt it whenever things start moving in a positive direction.

    There have been signs in recent months that the Vanguard Diehards board may soon be able to make a successful break from the abusive group. It is not 100 percent clear yet how that effort is going to go. But as I note in the first words of the blog entry, things have been lookng up for that community. Please keep your fingers crossed!

    Rob

  3. Anonymous says

    Hmm. I read through the rules and regs for the board and see no mention of such a ban. The topics they cover sure are broad and the only bans I see are on politics and religion.

  4. Schroeder says

    After reading the active/passive discussion from Petrocelli and Heaths on the Morningstar thread, I see that they are talking specifically about mutual funds. However Rob, you are using their limited and specific definition of active/passive as a springboard to allocation changes in response to valuations. I just thought I would make that clarification for your blog readers here.

    I would be curious if you can point to another Morningstar thread where Petrocelli, Heaths or other posters there have actually discussed allocation changes in response to valuations.

    Schroeder

  5. Rob says

    I read through the rules and regs for the board and see no mention of such a ban.

    The published rules not only do not support the ban, they prohibit the tactics that were employed by a group of abusive posters (led by Mel Lindauer, author of The Bogleheads Guide to Investing) to impose the ban.

    Here is an article which provides snippets from 101 posts (a tiny sample of what is available by reviewing the Post Archives of our investing discussions of the past six years) in which our fellow community members expressed a desire that honest and informed posting be permitted both on the safe withdrawal rate topic and re what the historical data says re the effect of valuations on long-term returns:

    http://www.passionsaving.com/investing-discussion-boards.html

    Here is an article that provides a few snippets from posts made to the Vanguard Diehards board in more recent days, a time in which a number of community members have been making efforts to escape from the reach of Lindauer and the Goon posters who have posted in “defense” of his abusive tactics:

    http://www.passionsaving.com/mel-lindauer.html

    I urge community members to get involved in helping out the Vanguard Diehards board community. We have enjoyed many great learning experiences as the result of conversations held at the board in the past and I see no reason why that should not be true for the future as well.

    The best course of action is to contact John Bogle and to ask that he remove his endorsement from the Bogleheads.com board. Bogle permits the Bogleheads board to use his name in their promotional efforts. It is posters at the Bogleheads board that have been regularly terrorizing the Vanguard Diehards board (the Vanguard Diehards board was at one time the most successful investing board in the history of the internet). Bogle obviously should not be permitting his name to be used in support of this sort of ugliness.

    I am 100 percent confident that the majority of participants at the Bogleheads board would be thrilled if honest posting on SWRs and on valuations in general were permitted at that board as well. We have seen extremely positive reactions to discussions of these topics at every board at which they have been discussed. We have also seen extemely negative reactions to the abusive tactics that have been emloyed by a minority to shut the discussions down (there has also been a good bit of posting in support of the abusive tactics, to be sure).

    Rob

  6. Rob says

    I would be curious if you can point to another Morningstar thread where Petrocelli, Heaths or other posters there have actually discussed allocation changes in response to valuations.

    Take a look at the two articles linked to above, Schroeder.

    If you check the history of the Vanguard Diehards board, you will find that it was at one time the most succesful investing board in the history of the internet. I began posting about our community’s safe withdrawal rate findings in June 2005. The community showed great interest both in that topic and in the topic of what the historical data says about the effect of valuations on long-term returns in general. It was that community response which prompted Lindauer’s Campaign of Terrror against the board community.

    The Lindauer supporters have now moved to the Bogleheads.com board and the Vanguard Diehards board community has on numerous occasions expressed a desire to be freed from the “dogmatism” (you hear that word there a lot) that has all but destroyed their board community. We all benefit from a lifting of the ban on honest posting now in effect at that board. I hope that you and others will do what you can to help out.

    Rob

  7. Don says

    Its intereting that both communities thrived PRIOR to Rob’s crusade, one died after it, and the other has yet to experience it. It seems that the current moderators at the Bogleheads are probably smart enough to prohibit him in the first place.

    The major problem with Rob is not Rob’s message. It is Rob. Especially his ‘prophetic’ certainty based on numbers that were made up by JWR and numbers that Rob himself does not even understand. Also, his complete ignorance of nearly every aspect of finance does not help either.

    The bottom line is that Rob is trying to capitalize on the fear and greed of many naive and foolish investors who lost a lot of money during ‘bubbles’ by broadcasting far and wide. Unfortunately for Rob, he has chosen a tactic that cannot ever work and his own ego gets in the way of his salesmanship.

    What you will find at Bogleheads is a community consisting of many seasoned investors who survived bubbles and crashes perfectly fine. The advice reflects that. Since Rob’s personal experience is completely bizarre (saving all of his money for a few years after saving nothing most of his life and then quitting his job and trying to retire with a family of 4 (who have most likely left him) on 400k) – he tends to give advice that does not apply to normal and responsible people.

  8. Rob says

    [i]Its intereting that both communities thrived PRIOR to Rob’s crusade[/i]

    It’s certainly fair to say that both communities attracted lots of posters prior to my posting at them, Don. That’s part of what it takes to “thrive,” but not all of it.

    The goal of an investing board is to help people to learn how to invest successfully. A board at which the safe withdrawal rate (SWR) is being reported inaccurately is not “thriving” in a complete sense. What I brought to the table was accurate reporting of SWRs. That’s not a bad thing. That’s a very, very, very good thing.

    Why do you think it is that there are thousands of community members who have expressed a desire that honest posting be permitted at these boards? It’s because the majority of community member gets this. The majority understands that to learn we need to be open to new ideas. New ideas are not something to run from, not something to fear, not something to ban. New ideas are the lifeblood of a community.

    Why is it that you use the word “crusade” to describe my decision to post honestly on the SWR topic? If those posting honestly are engaged in a “crusade,” are not those posting abusively? And why even refer to honest posting as a “crusade” in the first place? Why use that kind of language to refer to something so natural and understandable as the desire to post honestly when sharing ideas as to how to invest successfully? Are there not boards where people post honestly on fashions and cars and food and where their efforts are not labeled a “crusade” because they do so? Why must the discussion of investing topics be treated so differently?

    It’s because investing is so emotional. We are now at one of the highest valuation levels ever seen in the history of the U.S. market. It’s because investing matters to people; what happens to their investment portfolios affects their futures in very serious ways. When I post what the historical data says on the long-term returns we are likely to see going forward from these valuation levels, it scares some people to death. That’s why you see the abusive posting. That’s why you see the bans on honest posting. That’s why you see entire board communities being burned to the ground.

    You know what? All that shows us why we need to permit honest posting on valuations, not why we should ban it. The very fact that there are some who cannot bear to look at what the data says should tell us that it is terribly important that we all begin doing so. If what the historical data says didn’t matter, you would not see this sort of reaction when the subject comes up. The bans themselves argue against the bans!

    Rob

  9. Schroeder says

    “Take a look at the two articles linked to above, Schroeder.”

    Actually, I would prefer to read a Morningstar thread. Can you provide a link to a recent discussion by Petrocelli, Heaths or other posters discussing their allocation changes in response to valuations?

    I can understand if you cannot. Maybe that particular subject has not been on the minds of Morningstar posters in recent days. I would tend to believe that is the case rather a so-called ‘ban on honest posting’.

  10. Rob says

    What you will find at Bogleheads is a community consisting of many seasoned investors who survived bubbles and crashes perfectly fine.

    It sounds to me as if you are talking about the little bear markets that come along from time to time. That is not what we are living through today. We are today in a secular bear. The last secular bear began in 1966. How many of the Boglehead posters do you think were active investors in 1966? The answer is — Not that many.

    This is why I argue that people need to look at the historical stock-return data. No investor can gain the perspective needed to understand what is going on when prices get to the sorts of levels that apply today without checking out what has happened at earlier times when this happened. These are extremely unusual events. There have only been three times in the history of the U.S. market when we have seen these price levels. The average price drop on those three occasions was 67 percent. How many of the Boglehead posters have survived a 67 percent price drop? The answer again is — Not very many.

    The types of price drops you see from normal valuation levels are just not comparable to the types of price drops you see going forward from the sorts of price levels that apply today. You are comparing things that cannot be compared. I’m 100 percent confident that you are smart enough to understand the difference. But are you willing to spend enough time looking at the historical data to see the significance of the difference?

    Some are. Some are not.

    The problem we face today is that the small group that is intensely opposed to the idea of looking at the message of the historical data is willing to use absusive tactics to destroy boards at which large numbers of community members express a desire to do so. There are rules at all the boards at which I have posted to protect the community as a whole from these sorts of tactics. These rules should be enforced.

    The advice reflects that. Since Rob’s personal experience is completely bizarre (saving all of his money for a few years after saving nothing most of his life and then quitting his job and trying to retire with a family of 4 (who have most likely left him) on 400k) – he tends to give advice that does not apply to normal and responsible people.

    I have seen thoudands of references to my personal finances in the past six years. I have never seen one accurate one yet put forward by a poster who opposed honest posting on SWRs and on valuations. Does that not tell you something, Don? Do you not see that your inability to refrain from engaging in abusive posting on this question shows that your investing choices have caused you to feel a great deal of emotion when the historical data is discussed?

    You are not my enemy, Don. You are my friend. All the work that I have done in this area is there for your benefit as well as for the benefit of any others who care to look at it. Your emotion has overcome your ability to reason on these questions. That is a very bad sign.

    Say that you are right in every thing you say re investing. Say that I am wrong on everything I say. What possible harm could come from permitting honest and informed discussions of SWRs and valuations? Would the world blow up?

    You know what? If I really am wrong, permitting honest and informed discussions would show just that to lots of people. The very fact that you favor the ban on honest posting shows that you lack confidence that your position can prevail in reasoned debate, in my assessment.

    I am grateful to you for making an effort to interact. I think that shows that there is a desire within you to learn. I hope that that desire grows over time. I hope you will pay the site return visits.

    Rob

  11. Rob says

    Especially his ‘prophetic’ certainty

    I do not possess a “prophetic certainty” re how stocks will perform in the future. Anyone who spends even a brief time looking at the calculators will see this. The calculators show that there is a wide range of future possibilities. We assign probabilities to those, based on how stocks have always performed in the past. We certainly never express any prophetic certainty that any one return pattern is the one we are going to see.

    There is something that I do believe it is fair to be certain about, however. I am absolutely certain that the huge amount of money that was borrowed from future returns to finance the absurdly inflated returns of the late 1990s will be paid back in one way or another. Is the rational human mind capable of coming up with a scenario in which this will not happen?

    Where do those who oppose looking at the historical data believe that the money to support the absurd prices of the late 1990s came from? Did Milton Bradley print it up? Did it fall from the sky like manna? That money had to come from somewhere. Where did it come from?

    The historical data tells us the answer. It tells us that the money to support huge bulls is borrowed from those who invest in stocks in the years following the end of the huge bulls. There is not one exception in the historical record.

    We do not know precisely what return pattern we will see. There are a variety of possibilities. We do know with certainty that the money borrowed from future returns in the late 1990s had to come from somewhere.

    Rob

  12. says

    Yes, indeed. Rob Bennett is a trouble maker.

    Rob Bennett warned people against strategies that produce a 3% safe withdrawal rate, yet were advertised as having a 4% safe withdrawal rate.

    This was bad enough to get him banned.

    Have fun.

    John Walter Russell

  13. Anonymous says

    I think I made a mistake ever commenting here, and will stop looking at your blog. I’m new to this, but the best I can tell is that you were asked to leave these boards, did so, and that they are doing quite well without your participation. Your blog seems to be a lot of venting going on here. “Goons”, other name-calling, etc.

    ‘Fraid this comes under the category of “life is too short”.

  14. Rob says

    Yes, indeed. Rob Bennett is a trouble maker.

    Let’s face it, John — I’m bad to the bone!

    Everybody knows it too!

    Rob

  15. Rob says

    I think I made a mistake ever commenting here, and will stop looking at your blog.

    We will miss your contributions, Anonymous. I hope that someday perhaps you will reconsider.

    I’m new to this, but the best I can tell is that you were asked to leave these boards, did so, and that they are doing quite well without your participation.

    Some of the Goon posters asked that I leave. I was not willing to do so. I write for the people who are interested in learning about the subject matter of the boards. Those people expressed great interest in learning more about both the SWR topic and about the effect of valuations on long-term returns in general.

    The site administrators did not ask me to leave. I’ve never had a single post taken down because it was abusive (I have obviously never put forward an abusive post — my voice is the strongest voice in the Retire Early and Indexing communities speaking out in oppposition to abusive posting). The site administrators banned me, presumably because of the damage being done to their board communities by the Goons (which was considerable).

    My view is that the site administrators should have followed the published rules of their boards and banned the Goons. Actually, they probably would only have needed to have banned one or two of them to give the others the message. Each time an abusive poster is able to engage in ugliness without a site administrator taking action it makes the prblem worse because it sends the worst possible signal both to the Goons (to which it sends a signal of encouragment) and to the community members who have asked that the abusive posting be reined in (to which it sends a signal of discouragement).

    Your blog seems to be a lot of venting going on here. “Goons”, other name-calling, etc.

    I certainly would like to see the ban on honest posting lifted. I find it more than a little absurd that I even need to say that. Can you imagine someone needing to say about a baseball board “I favor the idea of allowing honest posting on whether the Pirates beat the Phillies last night”? It’s crazy. The fact that there are even more than one or two who favor a ban on honest posting in the investing area highlights just how emotionally charged a topic this really is.

    ‘Fraid this comes under the category of “life is too short”.

    My sense is that there are a good number who feel this way. I do not. Board communities are made up of people. Thousands of fine people have helped us learn about both saving and investing at our boards. I think those people have rights. I think of those people as my friends. I find it degrading that those people are not permitted to post honestly on subjects of considerable importance to them.

    Discussion boards are an important communications medium of the future. But they will not achieve their potential until the site administrators take seriously their responsibilities to adminsiter the site rules in a reasonable manner. That’s my sincere take re all this.

    Rob

  16. Rob says

    Here’s some language from the wiki that SWR Talk Lover is making reference to:

    “Unfortunately, the term “Safe Withdrawal Rate” is necessarily an ambiguous term. This is because initial methods utilized historical data to statically determine what would have been safe given the actual results that past portfolios would have generated with the variables given. The next logical step, of course, was to use that information to predict future SWRs. Either use is technically correct, but one should always be sure to be clear whether the use is in reference to past or projected SWRs, so that unnecessary argument can be prevented.”

    That’s a big improvement over what we have seen in the past, SWR Talk Lover. That statement is a big development. Thanks much for bringing that to our attention.

    No, I do not view those words as being entirely “open and honest.” They let people know that there are significant questions about the “safety” of the Old School numbers. The authors of those lines are to be applauded for that. They also leave out a lot, though. The statement is a positive development that falls short of what is needed.

    It would take a lot of words to work through what is good and what is bad in the new statement. Rather than put those forward here in the comments section, I think it makes more sense to address it in a future blog entry (or perhaps two — there are a lot of issues in play here). My guess is that I should be able to get that one up sometime next week.

    Rob

  17. SWR_talk_lover says

    Rob, tell the truth: it would never be enough, would it?

    No matter what the words said.

  18. Rob says

    The first thing that the Passive Investing enthusiasts need to fix is their attitude, SWR Talk Lover. When they fix their attitude, good words will just flow naturally.

    Do they want to learn more about how stock investing works in the real world? That’s the root question. If they do, they should invite honest posting on SWRs and on valuations, not merely tolerate it and certainly not attack it or ban it. When they invite contributions from all segments of the community, they will get them. Lots and lots and lots of them.

    Set forth below is a link to an article providing snippets from some of the comments put forward in the early days of The Great Debate. Please note the excitement that many Normals expressed about what we were learning. That’s the sort of thing that we need to hear from the Goons to get things back on the track on which we all deep in our hearts very much want this train to be moving on.

    http://www.passionsaving.com/community-comments-on-the-great-safe-withdrawal-rate-debate.html

    One group wants us to continue learning. The other wants us to pretend that we don’t know anything more today than what we knew back in the Summer of 1999. That’s a futile desire, you know? One group is putting its energies into something positive and the other is putting its energies into something negative. That’s the bottom line. If the Goons come to accept that we have learned important stuff during the discussions, all of the negativity comes to an end and we all experience a win/win/win/win/win. That’s when the real fireworks (the good kind!) begin!

    Rob

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Comments links could be nofollow free.