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Silencing Your Critics…

Every once in a while I venture into enemy territory to defend my claims.  The problem is, when you do this you are at the mercy of your foes and the rules of engagement that they abide by on their internet space (go ahead, call me a dork – I deserve it).  For instance, I noticed that several people on the Bogleheads website accused me of having an “agenda” and selling “snake oil”. I actually have no idea what snake oil is, but it sounds bad so I figured they were accusing me of something terrible.

Anyhow, I wrote out a lengthy comment to post at the BogleHeads website explaining how I am disturbed by the growing number of high fee advisors selling their alternative form of active management as “passive indexing” and that I think the whole concept of “passive indexing” misconstrues the reality of asset allocation (which is, by necessity, an active endeavor equating to simple asset picking).  My basic point was that everyone is an active investor because all asset allocation requires deviations from the global financial asset portfolio. That’s fine when it’s done in a low fee and tax efficient manner. It’s bad when it’s done in a high fee tax inefficient manner that promises market beating returns. But the idea of “passive investing” is mostly a false binary distinction in a gray area. The Boglehead people got all sensitive about this because they’ve invested most of their lives constructing “passive” narratives even though many of them are huge fans of factor tilts and other higher fee approaches….Basically, they don’t even see the contradictions in their own narratives because they’ve created this false black and white world where passive is good and active is bad. Reality is more complex than that and I won’t apologize for bringing terminological clarity to a debate that is muddled with marketing terms that oversimplify a fairly complex topic.

But the posts all got deleted or the threads were locked so I couldn’t comment because they didn’t like what I had to say since it disproved their narrative.  Of course, the best way to pass off an ideology is to sell it using catchy terminology like “passive indexing”.  But when that stops working because someone calls you out on it then it’s best just to silence your critics.

The problem is, the truth always gets out one way or another and people are guaranteed to realize, sooner or later, that the whole concept of “passive indexing” is just another sales pitch designed to help certain people and firms differentiate themselves from the competition.


  1. Cullen Roche

    I am not saying anything bad about the idea of using low fee index funds to construct a diverse and tax efficient portfolio. But the Bogleheads seem fully convinced that they’re not actually asset pickers. That’s fine by me. If people want to pick index funds without admitting that they’re picking assets inside a global aggregate then what do I care? Personally, I think it’s pretty important to understand what you’re doing, but that’s just me….

  2. Frederick

    Bad look on them. If they were smart they’d embrace your terminology, admit that they make active asset decisions and highlight the fact that they do it in a tax and fee efficient manner which still justifies their approach relative to most more active managers. Instead, they’re pushing back and looking bad.

  3. Cullen Roche

    They can’t say that. If they admitted that they’re “asset pickers” then they also have to admit that they rely on forecasting the future to some degree. It wrecks the whole narrative….

  4. Cullen Roche

    I should add – this is the most interesting part of the whole discussion. Because once you realize that we’re all active and relying on a forecast then you realize that the cornerstones of the perspectives are flawed. These “passive” investing ideas of “forecast free” investing and just picking the index are derivatives of EMH and rational expectations. And once you realize that these ideas are incorrect or misleading then the foundation of the views starts to become contradictory. Not only is EMH wrong, but just picking the GFAP index will, at times, also prove to be wrong….ie. there’s nothing irrational about trying to actively pick a portfolio that can perform better than the GFAP….and yes, you can do so using low fee index funds in a highly efficient manner.

  5. jaymaster

    Funny. I’m actually
    very active at bogleheads, but under a different nom de plume. Or is that nom
    de guerre? 🙂 I’ve defended you quite a
    bit, but I have to admit, the post that generated all the outrage wasn’t one of
    the best you’ve written….

    There is a huge ongoing debate there over the definition of
    passive versus active, and some people throw in the word “tilting”.

    To me, it’s just semantics. But I think they have made some
    progress in the past day or so. I particularly like this diagram.


    Larry Swedroe is
    active there as well, and he is one of their gurus. He is a proponent of passive investing. Yet
    he clearly states that he only owns small cap stocks. Some people might call that active, but he
    still maintains that he is passive. Bill Bernstien is also practically
    worshipped there, and he has made it pretty clear that in his opinion, asset
    allocation is really the only thing we can and should actively control.

    So IMO, they are both advocating “active” choices among “passive”

  6. Cullen Roche

    Let’s be honest. We all know my point is undeniably correct. Anyone who picks assets inside the global financial asset portfolio is making active decisions. They are implicitly forecasting the future returns of certain assets inside of that portfolio. This should not be controversial.

    Factor investing is just another way of making active bets. It’s not passive. It’s an active endeavor mainly using naive backtesting. I see all this backtesting in the factor tilting data. It’s ridiculous. A backtest is just a naive forecast based on the falsehood that the future must look like the past. Factor tilting is just picking parts of the asset markets that you think will perform better. And most of the reasons for this picking is extremely naive and based on backtesting or no fundamental basis.

    It’s funny how they’re trying to blur the lines between active and passive now so they don’t have to admit that their ideology is wrong. But it is wrong. There is no such thing as passive investing. The whole concept was created for the sole purpose of differentiating index fund users from stock pickers. But it turns out that they’re engaged in many of the same active activities that stock pickers are engaged in. Yet it is sold as being “passive”. Sheesh. What a great marketing scam!

    The worrisome part is that many advisors on those websites sell high fee services marketing it as low fee “passive indexing”. And worse, they’re implementing this relatively naive asset picking approach by comparing it to closet index funds and then claiming that they’re doing something smart….It’s not necessarily smart. It’s just better than something really crappy (buying a high fee closet indexing mutual fund).

    Amazing how long this has persisted without someone calling them out. “Passive” indexers don’t do something that’s necessarily smarter or different. All they did was change the taxonomy and strawman the hell out of closet indexing mutual funds thereby pegging them as the entire sphere of “active” managers. It’s sad to think how many people think they’re doing something smart that is actually pretty stupid (like paying an indexer a high fee or picking assets in a naive backtesting based methodology)?

  7. jaymaster

    I agree with you. You were the first person to get me to understand how investing in an S&P 500 index isn’t passive at all, but actually making a bet on large cap American based companies. From there, the rest of your argument made sense. I even switched from the Vanguard 500 index to the vanguard total market index because of that. But I still realize I’m not entirely passive even with that.

    And don’t feel too bad about having the thread locked over
    there. The moderators are harsh. Many topics get deleted completely, and just about anything that devolves into a battle of semantics gets locked. I’ve been a moderator of other forums in the past, so I understand why they do what they do. But it’s still frustrating at times.

  8. Cullen Roche

    Well, it’s nice that people over there are reading my commentary. I don’t think they’ll throw in the towel on the idea of “passive” investing, but at some point they’re going to have to admit that they engage in a form of active forecasting. And that means the whole paradigm has to shift and the berating of all things “active” will come to an end.

    In essence, we’re all slowly morphing towards some form of active asset allocation. Which is fine. But the sooner we admit it the better informed people will be about what they’re doing.

  9. Frederick

    You’ve made your point CR. It’s obvious that you are right. We are all asset pickers and we’re all making a forecast of some type. Any honest person would admit that. If people don’t want to listen to you then screw them. They can go on thinking they’re being all smart without knowing that their whole process is actually pretty amateurish and misinformed.

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