Smart. Simple. Better. Modern. Best. Biggest. Most.

You’ve heard the marketing lingo, but how is your money actually being managed?

In this post we are going to look at the fundamental difference between Passive and Active Investing: DATA.

We encourage you to ask your manager if they are passive or active, and what methodology they use. If they can’t explain, or seem vague - it’s a problem.

What is Passive Investing?

The central idea behind passive investing is that you can’t know anything about the future performance of an asset, so you should just use a simple diversification technique. As a result, passive ignores all data except for price.

Two methods for doing this are Indexing,  and Modern Portfolio Theory.

Indexing is buying every Stock in an index like the Dow Jones or Toronto Stock Exchange in proportion to it’s market weight. This is a sensible diversification, and over the long haul, markets go up. ETFs for stock indexes like SP500 and TSX do exactly this.

Modern Portfolio Theory - created in 1952 - uses the expected returns and risk of assets based on historical price to create a diversified portfolio.  The idea is that on average an asset class - say stocks or bonds - has a certain return, and on average stocks and bonds usually move in different directions.

TRUTH BE TOLD:
Passive is surprisingly good, because doing something rational and systematic is better than picking stocks based on opinions.

What is Active Investing?

Active investors try to beat passive investors by using data, analysis and unfortunately sometimes, undisciplined opinion.

The central idea is that by using information or skill, you can do better than just holding indexes or averages.

Examples:

A stock broker who talks to his buddies for tips, picking stocks to buy or sell.

A hedge fund that use data and machine learning to rapidly make investment decisions 

Warren Buffett who buys companies cheap when others are afraid to.

As you can see - not all active managers are created equal, or use the same methods. Active managers all use data, but some use it better than others. Successful active managers always have a system for using data, and they keep disciplined.

TRUTH BE TOLD:

There are a lot of undisciplined active investors who would probably do better if they just used Passive Investing. 

Responsive: A Disciplined Mix of Passive and Active

Responsive uses ETFs to buy indexes, and Modern Portfolio Theory to set our default asset weights.

With passive as our guide post, we use a system that monitors hundreds of data factors to decide if we want to change our asset weights.

If the overwhelming “voice of the data” convinces us (and our computers) we will move our position in an asset up or down.

Conclusion:

Make sure you understand how your money is being managed. There is no substitute for doing your homework, even if someone tells you what they are doing is Simple, Smart or Better.