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“Deactivated User Account”

This is the message you will receive if you tell the Bogleheads that their approach is misleading – you’ll get censored by their moderators.  I didn’t think I was doing anything all that insulting.  Yes, I was on their site saying that the idea of “passive indexing” is misleading.  But most of the Bogleheads (the one’s with no vested interest in the branding behind “passive indexing”) should have no problem calling themselves active asset pickers – it changes nothing for them.

Now, I was simply explaining how there is one portfolio of global financial assets in the aggregate (a simple fact) and how anyone who deviates from that market cap weighting is making an active asset picking decision (a simple fact).  I explained it this way:

A buy and hold stock picker picks thin slices of the aggregate pie by choosing specific securities within the aggregate of financial assets.  The “passive indexer” broadens his/her horizons and picks a fatter piece of the pie in a buy and hold approach.  Importantly, the “passive indexers” don’t advocate buying the whole pie which would be roughly a 40/60 stock/bond portfolio at present.  No, they advocate (for various active reasons like “factor tilting” or personal reasons) that you should deviate from cap weighting.

I was further explaining that the very foundation of “passive indexing” is grounded in general equilibrium theory and ideas like rational expectations – ideas that are virtually useless for practical application.  If I am right then this has important implications for portfolio management because it would mean that some degree of dynamism and asset picking in a portfolio is not just useful, but totally rational given that the financial system and the global asset portfolio is itself quite dynamic and actively evolving.

Now, some of this is quite difficult to understand because I am tying the economics directly to the finance, but the internal inconsistencies behind passive indexing really bother me.   If the world of financial assets is dynamic, quite actively changing on a daily (literally) basis and doesn’t resemble general equilibrium then how can a static portfolio approach like “passive indexing” be appropriate at all times?    It just can’t.  Some level of dynamism is rational in a portfolio even if it means reweighting on occasion to account for changes in the global market cap portfolio.  This obviously annoys some people because there is a lot of money to be made by pitching the idea that indexers are inherently different than stock pickers and diminishing the difference will diminish the value of the concept of “passive indexing”.

Anyhow, I’ve decided to write a formal paper about this topic because I think it is incredibly important.  The entire concept of “passive indexing” is somewhat misleading.  It draws a distinction between asset pickers and stock pickers when that distinction is far less meaningful than one might think.  This shouldn’t diminish from some of the useful concepts of indexing (like taking a long-term view, reducing costs, reducing taxes, etc), but when your entire portfolio process is constructed around misleading terminology and false precepts then it’s worth blowing up that foundation and trying to start over again.

I’ll be back with more on this in the coming months….

  1. Avatar
    Guy Pierce

    Glad to hear you getting more involved in this topic
    Many others have been censored the same way you have and it is infuriating.

  2. Avatar

    The Boglehead people are mostly just amateurs who think they know a lot more than they really do. I doubt none of them actually understands the economics behind their thinking. They mostly just want low fees and diversification, but have fallen into the trap of being dogmatic about everything “active”.

  3. Avatar
    Cullen Roche

    I am surprised by the closed minded views over there. I commented on the site because I saw some links coming in the other week and it looked like some people were taking my comments out of context. So I went over to correct the views and just point out that what most BogleHeads do is actually a form of active asset picking. So what? It doesn’t change anything except for the people who rely on selling the concept of “passive” indexing. There are some firms and some authors who have promoted this idea hard and so they have a vested interest in maintaining that differentiation. But the vast majority of BH advocates really shouldn’t care if they’re called active asset pickers. It makes no difference for them.

    The responses I got were dogmatic. Militant. It reminded me of some of my run ins with econ debates. And you just know you’re really onto something when people respond that way. People don’t like that I ask them the tough questions and push their thinking. But when I get a response like that I almost always know I am getting at some weakness in their views….This is going to be a big debate in the coming decades. And those who side with Fama and Bogle will lose in my opinion. Their view is dogmatic and political even though many of them don’t seem to have connected the dots. I’ll expose it with time….I just need some free time to put the research together….The framework is easily exposed though. Surprised it hasn’t been done already….

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    Some interesting text description about Global Market Portfolio from Forbes

    “….the Global Market Portfolio is the apotheosis of passive index investing.
    1. Do you perhaps own an S&P 500 Index fund and call yourself a Boglehead? Bah! That is a mere bagatelle.

    2. Maybe you own a total US stock market index fund (including the small cap stocks beyond the S&P 500)? My friend, you are just a tyro making a home country biased bet.

    3. What if you own a fund that tracks the MSCI or FTSE world index of stocks — essentially, every stock in the world? Is that diversified enough? Far from it: you still invest in only a fraction of the global market…”

    ” … As Meb Faber succinctly puts it, “any deviations and you’re an active investor.” “”

  5. Avatar
    Cullen Roche

    I’ve shut down belligerent users on very rare occasions. But I’ve never shut down the debate just because people disagree with me. Mel Lindauer and the Bogleheads just didn’t like what I was saying. I wasn’t being rude. I was just disagreeing with them. There was no need to censor that.

  6. Avatar
    Cullen Roche

    Precisely. Any deviation from the global cap weighting makes you an active asset picker. I don’t care how they brand themselves. The term “passive” is entirely misleading.

  7. Avatar

    The term “passive” really means less active. It has a different degree of activeness relative to the moving target of the global cap weighting.

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