I’ve been harping on about Passive Investing for some time now, for those of you who are interested below are several posts on the subject:
As you might also know, my passion, both within Finance and Travel is to find the intrinsic value in things, and the more that people tell me something is right, the Contrarian in me wants to find a fault in it, because I don’t like being sold to, even if the product is legit. Therefore I want to start drilling down on the concepts that are purported to be ‘Passive Investing Principles’ and discover which ones are actually unique to that methodology and which are not, perhaps in doing so we can apply the best of Passive Investing to other strategies, and find opportunities for improved returns.
Asset Allocation for Passive Investors – Saverocity Finance
Portfolio Rebalancing for Passive Investors – Saverocity Finance
Betterment – Financial Product Reviews – Saverocity
Personal Capital Powerful Free Tool To Examine Your Investment
If you want more details on the concept, look through the posts above, but for now lets start with a definition:
An investment strategy involving limited ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance.[Investopedia Definition]
At first I would say that this is a little limited in terms of definition, but perhaps they have already gone through the process of eliminating the fluff, and got to the essence of things, I do have to say though, reading that definition it doesn’t sound like the brightest strategy.
John Bogle is the figurehead of the Passive Investing world, the founder of Vanguard and introducing the first low cost index funds and made them available to the general public.
10 Principles of Investing from a Passive Perspective
I guess the question is now, are these principles exclusively for Passive Investing, or have solid fundamental principles that could be applied to Active Investing, here is the list from John:
1. Remember Regression to the Mean
2. Time is your Friend, Impulse is your Enemy
3. Buy right and hold tight
4. Have realistic Expectations
5. Forget the needle, buy the haystack
6. Minimize the Croupiers take
7. There is no escaping risk
8. Beware of Fighting the Last War
9. Hedgehog beats the Fox
10. Stay the course
Of course, I loved the concepts here in general, but then I caught myself getting a little Ad Hominem about Bogle. The 10 Principles are his guiding points on Investing, to which he developed Vanguard as the vehicle to find the best solution to these Principles, however, upon reflection it seems that some of the Principles are at odds with other, and some may not be specific to Passive Investing at all.
I’m going to go through each Principle individually, to look at where they fit and if they are specific to just one entire paradigm of Investing, before I do which ones do you think are actually specific only to a Passive approach?
There are also a couple of Key concepts that are required to make a Passive Investing Strategy function, the key being Dollar Cost Averaging – if you don’t keep on investing then the strategy crumbles, as you can see when you look at the impact of financial naivity as displayed here by Dave Ramsey Compound Interest – the most misunderstood financial concept – Exposing the Myth of How Teens Can Become Millionaires by Dave Ramsey
The ultimate goal in this series of posts will be to explore and highlight a strategy that I am developing for making Passive Investing smarter, of course to do that it naturally has to get a little less passive…
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