Few topics in finance are as hotly disputed as the feud between advocates of active and passive investing. Bloomberg Gadfly’s Nir Kaissar and Bloomberg View’s Barry Ritholtz recently met online to join the debate. They previously discussed global equity valuations.
Barry Ritholtz: I have a foot in both camps, though my shop runs a mostly passive portfolio of low-cost global assets. So perhaps I am not the ideal Boglehead to make the case for passive investing.
However, I do believe a big chunk of your portfolio -- most -- should be passively indexed. Let’s begin our case by pointing out four of the key reasons:
No. 1. Lower costs
No. 2. Better performance
No. 3. Avoiding closet indexers that mimic indexers but charge high fees
No. 4. Preventing harmful investor behavior
I hope to focus most of my energies on issue No. 4 -- passive as a cure for bad investor behavior.
Nir Kaissar: I’m not ready to concede that lower cost and better performance are on the side of passive investing.
First, let’s define active and passive. To me, passive investing means buying a broad cross section of the market and weighting the components based on their market capitalizations. Everything else is active.