Barry Ritholtz has an interesting post up citing research that indexing still beats active management. This is an important nugget of information to have in your arsenal of knowledge as you try to manage portfolios, yours or for other people.
The debate between passive and active has been around for a while and is not likely to go away but I think it overlooks something that I have tried to explore here with a few posts. Being 100% invested in a particular index will have a certain amount of growth that can be expected and some measure of volatility associated with that growth.
A mutual fund manager, hedge fund manager and in many instances an investment manager (what I do) do need to show outperformance at some point for their clients or partners or they may start to lose business.
If you are managing your own portfolio the need to beat the market becomes less significant. A 50 year old with several million saved, a high paying job he wants to keep doing and a modest lifestyle needs growth but probably not market beating growth and the volatility that might go with it.
A 60 year old with $300,000 saved probably has a much greater need to be exposed to normal market volatility because this person is more likely to need to keep up with the market.
Part of managing your own portfolio is accurately assessing what you need your portfolio to do. Being too aggressive when you have more than enough saved can have the same result as being too conservative when you haven’t saved what you need; not enough money for when you start drawing paycheck off of your savings.
There are plenty of ways to construct a portfolio to meet your specific needs that should blend together things that behave like the Yield Hog ETF is supposed to (low volatility high yield) and things that behave like Research In Motion is supposed to (high octane explosive growth potential). These are just examples I don’t own either one.
The point here is, as an individual, your portfolio needs to do something. A financial plan (not a pitch for hiring someone, you can devise one yourself but at least read up on the how to do it) can tell you what your portfolio needs to do. If you only need 5% a year you may think twice about trying to make 20% a year.
I can appreciate that a trader will not have much interest in this line of thought.