Monday, May 25, 2020

Active mind set with passive investments - Your portfolio reveals preferences

Does return performance happen to you, or do you take responsibility for your portfolio returns? If a market surprise happens, do you say loses are the market's fault? Even if you hold index or "passive" investments, are you not still responsible for portfolio performance?

While we might live in a passive index investment world, it still requires that we have an active mind set which takes responsibility for portfolio construction and adjustments. The active mind set assumes ownership for what may happen to portfolio returns. You may not be able to predict portfolio returns, but your structured choices will be consistent with a range of outcomes. Passive investments do not infer there is a passive portfolio. A portfolio of risky index funds will represent a risky portfolio choice. The investor is responsibility for greater underperformance when there is a negative shock. Performance results will be consistent with the choices made even if there is no active management. 

An investor owns the world view consistent with their portfolio choices. A high exposure to equity indices is a higher risk, pro global growth portfolio. An unchanged portfolio over the last five months is a world-is-not-different portfolio. 

A portfolio is a set of revealed preferences regardless of whether it is viewed as passive or active. Portfolios reveal our market views whether we admit it or not. However, this does not mean that investor should become active except to the degree that their view of the world has changed.

No comments: