Tuesday, September 10, 2024

Active or passive investing? Think about strategy investing as another alternative

 


“You either have the passive strategy that wins the majority of the time, or you have this very active strategy that beats the market... For almost all institutions and individuals, the simple approach is best.” 

- David Swenson, former CIO of the Yale Endowment and the architect of the Yale Endowment Model 

Swenson comment is a cautionary statement. If you can find the active manager that has skill then use him and beat the market, but those managers are few, so the better downside protection is to just focus on the passive investment. For most the passive approach is better than chasing the elusive skill-based manager. 

Yet, if we are headed to a market slowdown or downturn, it may be worth looking at a subset of managers that may have timing skill at avoiding the downturn. Unfortunately, the sample size is very small for those managers. We just have not had that many bear markets. A middle ground approach is to add a strategy that does well in down markets. You are not directly investing in skill but playing the odds that the market will have characteristics that can be exploited by strategy action. For example, trend-following that is diversified across asset classes, investing both long and short, and follows trends that may be more likely to occur when there is uncertainty will likely do better in a period of downside transition. If you cannot invest effectively in the man, invest in the strategy.

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