I just don't understand the attraction to passive investing. The idea is simple enough; use only broad-based index funds and always stay fully invested (save for rebalancing to the target allocation). The proponents of passive investing believe that active management cannot reliably beat the market and they have plenty of data to back up the theory.
An article I read the other night about this investing style got me thinking. The chart below features all of the funds mentioned in the article, showing their performance year to date. I don't think the names matter a whole lot. It could just as easily be a completely different set of index funds, but the result would likely be very similar.
This has been a very aggressive bear market, with just about every stock or fund down a lot. The best-performing fund of those charted below is the DFA US Targeted Value Portfolio (DFFVX), which is down 30% year to date. The worst-performing fund of the group thus far is the SPDR S&P International Small Cap ETF (GWX), down almost 50% this year.
The article in question did not give weightings of each fund in the portfolio, but it is reasonable to assume the portfolio is down 35%-40% year to date and close to 45% since the peak in the S&P 500 on Oct. 9, 2007.As mentioned above, the passive indexers have the data on their side, so I will not win any debates; but how comfortable are you with your account dropping 40% and doing nothing to try to avoid a decline of that magnitude?
| The Bear Market Pull
Index funds followed a downtrend this year
|Click here for larger image.|
|Source: Yahoo! Finance|