Pragmatic Capitalism

Practical Views on Money, Finance & Life

The Arithmetic of Active Management

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One can’t be a “passive investor” if there’s no “passive index” one can buy! So who cares if you’re underperforming some theoretical and uninvestable index as long as you’re getting what you expect? If I can buy the broad market for .03%, then fine, I will buy a fund that does that instead of trying to duplicate the strategy myself at much higher costs. But what if there’s no index and fund available for the strategy you want to utilize?

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Posted by MachineGhost
Posted on 06/07/2016 12:14 AM
Private answer

We don’t need a [perfectly passive index to reflect the understandings of being passive. Or what I would call smart active investing. Getting close is good enough for most people. The key understanding in the arithmetic of active management is understanding how big the mistakes can be over time. For instance, the difference between paying 1% for an active fund promising market beating returns vs the 0.1% index fund will be huge over the long-term. That’s the lesson of the arithmetic. We don’t need to be perfect, but important understandings will help us avoid the big mistakes that cause big problems down the line….

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Cullen Roche Posted by Cullen Roche
Answered on 06/07/2016 7:17 PM