Are You a PINO?
No, I didn’t forget the “T,” although if I had to pick a wine I would be, it may well be a pinot noir.
This is not a political post, but bear with me for a sentence or two. I happen to be registered as a Republican, as I have been for over 30 years. I do not, however, agree with all of the Republican Party talking points, so I often get labeled a “RINO,” or, Republican In Name Only. It’s an epithet that gets thrown around whenever someone dares disagree with the party orthodoxy, and it’s become so ubiquitous as to be meaningless.
Why do I mention this? Well, one of the main things that allowed me to return to finance in the capacity I have, as a financial planner, is not only the relative ease with which we can now create “passive” investment portfolios for clients, but even more importantly, the increased openness among clients to recognize the advantages of passive vs active investing.
A simple Google search on “passive investing” will return a myriad of links to articles, blogs, and yes, even sites marketing opportunities to pay people to actively manage passive investments!
What is passive investing, really? According to the website, “smartasset,”
“Passive investing – also referred to as passive management – is an investing strategy that involves buying and holding investments for a long period of time, rather than making frequent trades to try to beat the market.”
Put even more succinctly, passive investing is just investing, rather than speculating.
Passive investing also gained a lot more popularity over the decade since the financial crisis of 2008/2009 because the USA experienced the longest bull market in history. It’s easy to “buy and hold” when what you’ve bought and are holding is only going up in value. The market instability brought on by COVID-19, however, has introduced a whole slew of passive investors to the temptations of active investing, leading many to become PINOs, or Passive (Investors) In Name Only.
This brings me back to a post Rick Ferri made a few years ago, entitled, “Passive Investing Is Power Investing.” A key passage for investors who risk becoming PINOs:
“Investors should select the best way to manage their portfolio so as to have the highest probability for success. Finding an actively managed mutual fund that delivers alpha is a challenge for any investor. Trying to select a portfolio of active funds that outperforms a portfolio of index funds is another matter entirely. The odds of a portfolio using actively managed funds outperforming an all index fund portfolio is much lower than a single fund, and the odds drop with each additional active fund added to a portfolio, and the longer the funds are held. Active fund investors have strong headwinds against them. The probability of selecting a winning fund is low; the average payout for those winning funds does not compensate them enough for the shortfall from being wrong; the addition of several active funds in a portfolio reduces the probability of success; and the longer that portfolio is held, the odds drop even more. That’s a lot of headwind!”
How, in addition to picking the “right” investments, do active managers attempt to outperform the market? By market timing. I feel that this is the most appealing of “active” temptations to potential PINOs. It is easier for people to internalize the idea that picking winning stocks is easier said than done than it is to resist the idea that they can judge when to “get out” of the market to avoid losses.
Makes sense. Human nature. Fight or flight. We all want to avoid losses, don’t we? If I had a dollar for every time I heard someone suggest that they needed to go, “all cash” to avoid the coming market crash, well… I’d have enough dollars to pay for this website to be hosted, at least.
But that’s speculating again, not investing, and it brings us back to the biggest question of all: when to get back “in.” I sure don’t have the answer to that question.
Below is the S&P 500 Index value between February and July 2020:
If you had sold your investments, and gone “all cash” in February, pre-COVID, you would be thrilled. Imagine having done that, and then gone back “all in,” say, at the lows on March 23! Wow. What a return.
Imagine, on the other hand, having sold after getting nervous some time in March prior to the lows - or even at the low. When would you have felt comfortable getting back in to the market? After the initial recovery of just under 20% by the end of March? Or after it had drifted up another 12% or so by the end of April? Or might you have waited until early June, when the S&P 500 recovered basically to pre-coronavirus levels, locking in your losses & missing out on the recovery?
Hindsight is always 20/20. And yes, I fall victim to looking backward as well, wishing I had done X, Y, or Z. One of the biggest challenges we all have as investors is to stay the course. This doesn’t mean making zero adjustments. We may need to rebalance as a result of life events, or add/remove risk based on personal comfort levels, but making changes to a well constructed long term investment portfolio based on short term market or economic events which are outside of our control can turn us quickly from investors to PINOs, better known as speculators.
