It’s official. After more than a year of hinting around, I’m ready to say it: I NO LONGER RECOMMEND PASSIVE INVESTING. Allow me to clarify. I remain 110% convinced that it remains your duty and privilege as a fiduciary advisor to help investors understand and apply the same investment principles that have long guided them past Wall Street’s freak shows, onward to their main events. But like it or not, the term, “passive investing” is no longer the best term for describing your continued calling. Henceforth, I’m recommending “evidence-based investing” as the new term for the same cause.
I say “like it or not,” because I’m sorry that the terminology has changed. I’m sorry for at least a couple of reasons.
Everyone Was Finally Getting To Know Us
As I described in my recent post, “A Fifteen-Year Reflection on ‘Passive’ Investing,” I distinctly remember the days when the number of times I would run across friends or family who were familiar with the term “passive investing” was on par with the number of times I’ve been on Oprah. (Goose egg – so far.) I could sometimes generate a spark of recognition if I dummied down the description:
“It’s like indexing on steroids.”
“Oh, you mean like that Vanguard fund?”
“Yeah, sort of.”
Today, I can call it passive investing instead of indexing and most people understand. Or at least they think they do.
“It’s called passive investing.”
“Oh, you mean like that Vanguard fund?”
<Sigh> Yeah, sort of.
If Not Passive, Then What?
There’s another reason I’m sorry to see “passive investing” go. While the general public only recently grew familiar with the term, it’s had a good, long run among those of us who have embraced it. Outsiders may not have known its full meaning, but we did.
In the good old days, there was passive investing versus active speculation. Black and white. Hatfield and McCoy. When I launched my business in January 2009, I could ask an advisor which he or she espoused, and, at least with respect to investment strategy, the answer told me whether we’d be a good fit for one another. Boom, done.
Then, as any living strategy should, passive investing kept evolving, incorporating factors like profitability and momentum, which may or may not fall into the traditional tale of risk/reward. Thought leaders among us have been forging meaningful new solutions based on the latest academic insights for helping investors maximize their expected returns while minimizing the related market risks. New funds, fund managers and other solutions have emerged to augment and sometimes challenge existing choices.
Bottom line, the terminology is having a hard time keeping up with the progression of solid financial economic theory and its practical applications.
Plus, the term “passive” has never sat all that well with us anyway. It has a way of suggesting that we are the investment world’s equivalent of Winnie-the-Pooh who, while lovable, does not necessarily evoke the sharp financial acumen we embrace.
Should We Stay or Should We Go?
As someone who is dedicated to helping passively minded advisors communicate their critical messages, I’ve been keeping a close eye on when (or if) to change our terminology. From my perspective, the time has come.
I not only scan the financial press and have been seeing an increasing shift there, I also ask every new advisor client about his or her preferred terminology. Not very long ago, nearly everyone would tell me they were at least okay with if not enthusiastic about “passive.” Today, those tables have turned. Far more of the advisors I serve tell me that they would prefer to move away from the term, if they haven’t already.
A Towering Babel of Terminology
If we don’t call it “passive investing,” then what? While most seem to agree that a change would do us good, it’s less clear what that change should be. As I’ve scanned the media, advisor websites and other forums, I’ve come across a Towering Babel of Terminology. Here are a few candidates I’ve spotted or heard (in alphabetic order):
- Asset class investing
- Elective management
- Evidence-based investing
- Market-based investing
- Smart Beta
- The “Wall Street rejection” model of investing
I’m sure there are plenty of others. And I’m not making up that last one, by the way. Here’s the link.
Coming up with a common term is important, and should take place as soon as possible. I know, this is like trying to convince a bunch of Maine Coon cats to leap into a single small sack, but …
As alluded to above, the public has a hard enough time understanding what we’re about. If we don’t quickly and collectively come to a new term, we run the risk of dousing the beacon of light we’ve kindled so far. To help investors find their way past the many smoke-screens, we must continue to stoke a clear, communal bonfire if we are to remain easily found. We need to pick a common name and consistently embrace it in our communications – to individuals, to the press and among ourselves.
Certainly, each possibility is imperfect. Whatever we use will likely get misinterpreted. We will each have our personal preferences. But the importance of coming together is tantamount. If we use consistent language, we can work together on clarifying it over time, just as we have with “passive.” As much as we bemoan the term, we really have made incredible headway over the past decade-plus in alerting the public that there is a difference. Many have noticed and benefited.
Pssst. Evidence-Based Investing
I recommend we rally around “evidence-based investing” for a couple of reasons:
It’s already gaining traction. It’s the term I hear most frequently among the U.S. advisors I serve as the preferred alternative to passive investing.
It gets to the heart of our durable differentiator. When you strip away the confusion, misunderstandings and misperceptions, the clear differentiator that best distinguishes your investment advice is your timeless commitment to go wherever the solid academic evidence leads. We may include or drop particular factors. We may explore tales of risk, and/or behavior, and/or other lines of inquiry. We may favor rock-bottom costs or cost-justified management. Ideal solutions may shift and vary. Regardless, whatever the evidence indicates is where you will go with your fiduciary client care.
Whew, I’m getting quite worked up. When I’m in my comfort zone, I prefer to be more like a Swiss chameleon, helping evidence-based advisors like you communicate your messages, rather than spouting off my own. I hope that helps underscore how strongly I feel that it’s in your and investors’ best interests for as many of us as possible to start using the term “evidence-based investing” (don’t forget the hyphen) to describe what was formerly known as passive asset class investing.
This is what I believe. Pass(ive) it on.