QuickTake: The Downside of Passive Investing

Do you have a major cash outlay looming?   Do you want to stay invested in stocks but are concerned that, in the meantime, a large market drop will leave you with insufficient assets?  If so, passive investing may not be for you.   That's because passive investing mimics the ups-and-downs of a market index such as the S&P 500.  It provides no downside protection.  Instead, you might want to invest in a more defensive actively-managed portfolio.   This QuickTake offers some thoughts on the issue.

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Episode Transcript

Speaker 1 (00:02):
Hello, I'm Clem Miller.
Welcome to Skeptics Guide toInvesting.
Today I'm doing a quick take onthe downside of passive
investing.
This quick take is pertinent tothose of you who are concerned
about losing your investmentmoney and are willing to forego
some upside return in exchangefor some downside protection.

(00:22):
Are you somebody who wants tostay invested in the stock
market but is concerned aboutlosing money ahead of a big
personal cash outlay?
If so, this quick take is foryou.
So let's define passiveinvesting.
A passive investment product isany product that purports to

(00:43):
mimic the ups and downs of amarket index, such as the S&P
500.
By definition, a passiveinvestment product offers no
downside protection.
It follows the ups and downs ofthe index automatically.
To achieve downside protection,you need an actively managed
investment product that isheavily weighted towards three

(01:07):
defensive sectors healthcare,consumer staples and utilities.
You see lower weights toMagnificent 7 and other
technology stocks in defensiveportfolios.
As a result, defensiveportfolios have recently had
less upside than have passiveinvestment products.

(01:30):
However, defensive portfoliosare better protected in a
scenario where some share pricesfor the Magnificent 7 and other
technology stocks start tocollapse.
Of course, many folks look atthe lofty valuations of
Magnificent 7 and othertechnology stocks and wonder

(01:51):
when and not if, those shareprices will fall.
So, summarizing, if you havepotentially big cash outlays in
the near future, you may want toinvest in an actively managed
defensive stock portfolio, not apassively managed product that
simply mimics the ups and downsof the market.

(02:12):
Thanks for listening to thisquick take.
Stay tuned for more contentfrom Skeptics Guide to Investing
.