May 20, 2021 • 42 mins
Getting involved in your long-term investing is hard work and it doesn't always have to be you doing the personal heavy lifting. But maybe that's what's best for you and you might even be more successful because of it. Join us today so we can talk about the differences between active and passive investing, what they mean, and what some of the benefits are.
Maybe you're doing everything right already!... But maybe you're not...
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Episode Transcript
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Chris Holling (00:01):
Oh, how do we, how do we start this one?
Sean Cooper (00:08):
active versus passive management there, it's
began. Actually, maybe we shouldintroduce ourselves.
Chris Holling (00:18):
Such a, like, I'm just gonna drop this plate in
front of you like here. Eat it?
Sean Cooper (00:22):
Yep.
Chris Holling (00:23):
Hope you like is ready.
Yeah, yeah, yeah. Today Todaytoday Hey, welcome, welcome.
(00:43):
Welcome, ladies and gentlemen,boys and girls to another
episode of the truth aboutinvesting back to basics. My
name is Chris Holling.
Sean Cooper (00:52):
And I'm Sean Cooper.
Chris Holling (00:54):
And we are going to talk about what did you say?
Sean Cooper (00:57):
active versus passive management.
Chris Holling (00:59):
Look at that, we are going to talk about that.
And let's, let's do the thingthat we've been doing this
season where I describe what Iunderstand about it. And then
you tell me if I'm wrong. Tellme how wrong I am.
Sean Cooper (01:16):
It's a lot of fun.
Chris Holling (01:17):
Yeah, you know, actually, this one, I feel like
as far as just general concepts,I feel like I understand this
one. The least I feel like Ifeel like I just have a base
understanding of this one when Ithink of passive and active
investing. To me. And I think asI'm saying this, I'm kind of
(01:38):
forming my thought, I think thereason that comes off this way
to me is because I'm more of aconsumer than I am anything else
on this. So when I think ofpassive and active investing, I
think of I have a certain amountof money that I might hand to an
investing firm, or say a certainamount of precious metals that
(02:02):
I'm sitting on, and I hang on toit, and I kind of allow the
market to happen. And when it istime to sell roughly around that
time, I hope that my amountshave grown and gotten to a
certain point over let's say 20years, and sell and set up my my
(02:25):
wins and losses. However,however you want to look at it,
and hopefully through acombination of inflation and
interest. And however I havethat arranged that. That's what
I acquire whereas activeinvesting, I like I immediately
think of like day trading stockswhere it's like, it's it's a
high price now I'm going to sellit now. Okay, now let's go Okay,
(02:46):
now I'm going to and you'redoing it throughout the course
of the day. And I I'm sure thatthat's not exactly it. But those
are the two extremes that sit inmy head especially is like a
consumer view. So how, how faroff base? Am I on that?
Sean Cooper (03:01):
Not not too far, really. I would say your
description of you know, kind ofbuying and holding precious
metals, that would definitelyfall on under passive. So you
had that one down, Pat.
Chris Holling (03:13):
See that down Pat. You heard it from the guy?
Sean Cooper (03:15):
Yep
Chris Holling (03:16):
man.
Sean Cooper (03:16):
Yep
Chris Holling (03:17):
on record,
Sean Cooper (03:18):
the the stock trading day trading, that would
be an example of activemanagement, handing it over to a
professional money manager.
While a passive approach fromyour standpoint, as an investor
it still would still beconsidered active management
because most likely thatprofessional money manager is
(03:40):
going to be actively managingyour portfolio.
Chris Holling (03:45):
I wondered about that. I hesitated saying it, but
I I'm okay with being wrong onon public internet waves.
Sean Cooper (03:55):
So I mean, it does depend on the manager. So in
general terms, active managementreally just means typically
you're hiring some professionalmoney manager to do it for you.
The other example would be is ifyou're actively buying and
selling on a more regular basis,like you were describing with
(04:16):
the the day trader, the stocktrader, whereas passive
management is typically a buyand hold strategy, you might
rebalance periodically, probablya good idea to do so. And it
would still be typicallyclassified as passive
management. Even if you'rerebalancing say a couple times a
year or once every couple years,that sort of thing. From a
(04:39):
investment standpoint, so whatyou're actually looking at when
you are investing in a an activemanager versus a passive
manager, typically speaking,most mutual funds and hedge
funds would be classified asactive management. So there's
some professional money manageroverseeing the funds inside of
(05:00):
that mutual fund, they're goingto be the ones making the buy
and sell decisions. And they'retypically going to be fairly
active about it. Whereas on thepassive side, you're looking at
index funds. So it's still amutual fund, but it's tied to an
index. So there's not someprofessional money manager
overseeing and making buy andsell decisions. It's just a
(05:21):
matter of are these holdings inthe index as it has this
holding, fallen out of the indexgone into the index, and you're
only really buying and sellingwhen that happens? Or to
potentially rebalance?
Chris Holling (05:33):
Okay, sorry, what's, what's an index?
Sean Cooper (05:35):
an index, So people often quote like the s&p 500?
Chris Holling (05:40):
OK
Sean Cooper (05:40):
is an index, the Russell 2000 is an index, the
eafe is an index. It's just abasket of in this case, what are
the examples I gave stocks?
Chris Holling (05:54):
Sure
Sean Cooper (05:55):
Barclays Capital aggregate bond index would be
another one bar cap agg,
Chris Holling (06:00):
sure
Sean Cooper (06:02):
so there are certain requirements for a a
security to fit the profile ofthat index, and basically either
fits or it does not fit. s&p 500is just the 500 largest
capitalized stocks in the US. Soeither you're in the top 500, or
you're not there's you don'tneed any experts to make buy and
(06:25):
sell decisions based on thatyou're just tracking index.
Chris Holling (06:30):
I have a question that's probably going to take
you off topic.
Sean Cooper (06:33):
Okay.
Chris Holling (06:35):
Do you happen to know off the top of your head?
What company or like a couple ofcompanies that have been in the
500? The longest just out ofcuriosity?
Sean Cooper (06:45):
That I do not?
Chris Holling (06:46):
I'm just curious.
I don't know. I just, I justwondered.
Sean Cooper (06:51):
No, that's a great question. That the biggest ones
are in in it now are all prettymuch tech and they were have not
been in it very long at all. Butif you want if you want a longer
track record in the index you'dwant to look at would be the Dow
Jones Industrial Average,because that's been around
longer, and that has some veryold companies in it.
Chris Holling (07:12):
Okay. Okay.
Sean Cooper (07:14):
Yeah,
Chris Holling (07:14):
I was just I was just curious if you just knew
something off the top of yourhead.
Sean Cooper (07:17):
Nope, not particularly.
Chris Holling (07:20):
Well, sorry.
listeners. Go. Figure it out.
Sean Cooper (07:25):
Yep. Chris, you can look it up while I keep blabbing
on about passive investing.
Chris Holling (07:30):
Okay, I'm gonna I'm gonna try I'm gonna try the
the researching and edit out allmy angry typing later.
Sean Cooper (07:37):
Okay. I don't know why its angry typing, but sure,
Chris Holling (07:40):
because it's, it's not here. That's how it
sounds. Sorry. Okay, you goahead. And I will be researching
as you continue describing,
Sean Cooper (07:50):
okay, so ETFs, or exchange traded funds are also
typically passive investments,because typically, they're also
tracking a an index, orsomething along those lines,
there are some active ETFs. Theidea of an active ETF is kind of
strange. But that's anothertopic entirely. As far as the
(08:17):
kind of pros and cons of each,the idea behind active
management is that you'reprof... paying this professional
money manager, ideally to eitherenhanced your performance or
reduce your risk withoutsacrificing performance in some
way, shape or form. That that'sthe concept anyway, active
(08:44):
management does tend to, or atleast has a better chance of
outperforming when the market isvery volatile, especially a
volatile market going sideways.
same holds true for a bearmarket, so market in decline.
Whereas passive management tendsto outperform during a bull
market, it's very difficult foran active manager to outperform
(09:06):
a bull market. What the studieshave found is that over the long
term, passive management tendsto outperform anyway. And the
reason being is the activemanagers, the even even the very
good ones, over the extendedperiod of time. If they do well
tend to basically offset theirfees and the fees of trading. So
(09:33):
they essentially breakeven. Now,there are obvious, obviously
exceptions to that. However, thenumber of exceptions, doesn't
actually exceed what you wouldexpect from basically from just
random chance, if you will. Atleast from the you know, The
(09:56):
statistical level, and that'swhat we see coming out of the
big institutions. So,
Chris Holling (10:04):
okay, okay, I got I got good news and I got bad
news. Okay. The good news is, Ifinished my research,
Sean Cooper (10:12):
nice work.
Chris Holling (10:13):
The bad news is that I was not able to research
and listen to yousimultaneously. So I need you to
give me like, a 10 secondsynopsis of what you just said,
that I need the crash course Ineed the, I need the like, this
is what I said I go, okay.
Sean Cooper (10:34):
Okay.
Chris Holling (10:35):
Ready? Go.
Sean Cooper (10:36):
Okay, the idea behind active management is to
provide some form ofoutperformance either actual
better returns or lower risk.
And they tend to do better hasthe opportunity to do better
during a volatile sidewaysmarket or a bear market, whereas
passive investing tends to dobetter outperform in a bull
market. The statistics show thatthe active managers typically
(11:01):
cannot do anything more thanjust break even with the long
term.
Chris Holling (11:09):
No, no, no, no, that's 30 seconds. That's 30
seconds. I need I need the thethe 10 second five year old
explanation, because now I'mjust curious what you're gonna
say. That's how we're gonna
Sean Cooper (11:21):
eh. But if I give you 10 more seconds, that's just
adding 10 seconds
Chris Holling (11:25):
total, like you're starting over but only
have 10 seconds.
Sean Cooper (11:32):
I don't know that I could shorten it that much.
Chris Holling (11:35):
Oh, you're sure you could.
Sean Cooper (11:37):
active managers goal is to outperform in some
way, shape or form. Butstatistically, it typically does
not.
Chris Holling (11:46):
Nice.
Okay, five seconds.
Sean Cooper (11:49):
No.
Chris Holling (11:53):
Okay. No, that's, that's, that's fair. Because
it's, that's that's important tonote. Because if you're if
you're looking at that as a, asa whole, and you're, it kind of
goes back into some of the stuffthat we're we're talking about.
And I hope I addressed thisproperly, because I, I was doing
what I could to pay attentionsimultaneously. But when when we
(12:16):
are looking at those things, andwhen you're talking about the
differences between the two, itkind of goes back to what we
were talking about of comparisonof inflation to interest. And
that's why we started with itand why we opened with some of
those things, to talk about someof the comparisons that it's
good to do something and chancesare as you're addressing the,
(12:36):
the active portion is going tooutperform the two which is
which is why it's good to learnabout these things and get
involved.
Sean Cooper (12:43):
Over the long term, the passive actually outperforms
the two
Chris Holling (12:49):
shoot, well, then that completely disrupts
everything I just said
Sean Cooper (12:53):
the issue the active portion has is typically
speaking, the any outperformancethat it experiences is offset by
the higher fees associated withpaying the professional money
manager and paying for all thetrading costs that come in, in
with the active management. Now,there are a few exceptions to
(13:15):
that, like I said, just frompure sis statistical chance
there are exceptions to that.
But there are also exceptions asyou get into asset classes. And
what I mean by that is, the moreefficient a market is the more
efficient an asset class is, theharder it is for an active
manager to beat just a passiveindex. So for example, domestic
(13:36):
equities, even as you get downto small cap or mid cap or small
cap, whether you're do growth,growth or value, it doesn't
really make a difference. It'smuch harder for an active
manager to outperform those inthose asset classes. Because the
market is so efficient, anyother type of even bonds or
(14:00):
other international equities solike investing in Europe, again,
it's a very, they're veryefficient markets. So it's very
hard to take advantage of anytype of imbalances in terms of,
you know, things beingundervalued or overvalued, and
(14:24):
things of that nature, where yousee active management tend to do
a bit better. bond markets whereright, I mean, right now,
technically speaking, an activemanager should have the
potential to do better, becausewe're okay, maybe not right now,
but going forward where we'refacing a rising interest rate
(14:49):
market, which is going to havedownward pressure on bond
prices. An active manager shouldbe able to beat a passive fund
because the passive fund isbasically just going to continue
to get hit by those risinginterest rates, but then being
offset by the better interestrate down the road. Other things
like uh emerging markets orfrontier markets, where actually
(15:10):
investing in those marketsbecomes very cumbersome, just
because of the regulations. Andthe way you have to go through
the process of creating, evencreating an index becomes a
challenge. So an active managermay have the opportunity to take
advantage of those differentvaluations. same holds true with
(15:31):
some alternative asset classes.
So for example, managed futures,for example, there's no easy way
to wrap that that concept into apassive investment, to put it
into some form of passive ETF,it just, conceptually, it
(15:53):
doesn't work very well. So thereare instances where it can
certainly be advantageous tohave that active manager. And
again, you know, depending onthe market cycle, there are
other reasons why they mighthave a better opportunity to
outperform. But broadlyspeaking, statistically
speaking, if you look at thestudies coming out of, you know,
(16:15):
your big institutions Harvardand Yale, and those active
managers typically underperformor basically just offset their
own fees.
Chris Holling (16:28):
Okay, that makes sense. I is that is that why?
How do I put this is that whywhen discussing these as a as a
base, understand me just as a asa consumer, that I don't know
anything about investing and,and stuff like that, is that a
big reason why diversifying yourportfolio and, and things along
(16:51):
those lines is is encouraged,because then you have sort of
that that offset of the passiveinvesting that's doing well in
those consistent markets andindexes, like you're talking
about, as well as when there isa dip and there is a change, and
the active investors have thatopportunity to, in theory do
well statistically, like you'rereferring to and then and then
(17:12):
take advantage of those, thosetimes when those are available.
Is that why that's encouraged?
Or is there a differentreasoning different thought
process on that?
Sean Cooper (17:21):
There's certainly that's certainly a form of
diversification. Typicallyspeaking, when people talk about
diversification, they'reactually referring to asset
classes by asset class, notnecessarily by management style.
However, that is certainly aform of diversification. And
typically, what you see withthat is people will use like a,
(17:42):
what they call a core andexplore strategy. So they'll
have a strategically diversifiedcore of their portfolio, call it
60% 70% 80%. That isstrategically allocated, they're
going to buy and hold, they'regoing to use it as a passive,
passive investment rebalancedperiodically, and then depending
(18:04):
on what they're they're willingto, potentially, in some cases,
risk, depending on what they'reusing for that explore, piece.
That other piece of the pie thatyou know, 10, 20, 30, 40%,
whatever it is, ends up beingused. Oftentimes, it's in a more
(18:27):
aggressive fashion. So it mightbe in something that has a bit
more risk. But also potentiallymore reward.
Chris Holling (18:37):
Well, no, that's, and I'm sorry, I'm cutting you
off here. But I'm, I'm doing twothings partially, because the
that's that's why I was askingwas the high risk versus low
risk, if you're looking atsomething that's high risk,
where it's technically somebodythat's active versus the low
risk is something that'sestablished, and it's slow, and
over time, like you were talkingabout a little bit earlier. And
(18:58):
the other reason I'm stoppingyou is because unless we're
going to dive into it right now,correlation, diversification is
our next episode. And
Sean Cooper (19:08):
that should definitely be its own
own episode.
Chris Holling (19:10):
Okay. Okay, cool. I'm just, I'm just taking
the reins in cause That's myjob.
Sean Cooper (19:16):
No, no, the one other thing I would
I would add is, you know, inthis particular example,
depending on how you're using anactive manager, they may
actually be used as more of aconservative play. So that
Explorer is actually aconservative piece of the
portfolio, you're using it forprotection, because you're
(19:36):
hoping that active manager isactually going to do better when
the markets do poorly. So it'snot always a an aggressive play
a risky play, but it's just moreoften used the other way.
Chris Holling (19:53):
Okay, yeah, that makes sense.
Sean Cooper (19:56):
So, what did you find?
Chris Holling (19:59):
Oh, thank you. Look at you keeping
me on track, I was not able tofind S&P that was, specifically
that's what I was interested inbecause I thought, you know, the
top 500, who's been in the top500 the longest, but I just I
just had a hard time finding it.
But what I did find is the sixstocks that have been in the Dow
(20:21):
the longest,
Sean Cooper (20:22):
perfect.
Chris Holling (20:23):
And now I mean, I really just googled this and
this this was just the, the hotbutton that I picked here. So
you know, always always checkyour sources and bla bla bla bla
bla bla bla, but this is fromfool.com The Motley Fool. I've
Never heard of it. Oh, you knowit. Okay.
Sean Cooper (20:41):
Yes.
Chris Holling (20:42):
Cool. So it looks like the number one that's on
here is General Electric.
Sean Cooper (20:48):
Oh, that's not surprising
Chris Holling (20:49):
General Electric has been in the index since
1896. Actually.
Sean Cooper (20:54):
Alright, that's not quite as long as I would have
expected but
Chris Holling (20:57):
Oh, no. Okay.
Then followed by that is ExxonMobil, which is 1928. When they
got on there, then Procter andGamble, which I don't know any
of these things, so they areperhaps best known for tide
detergent, crest, toothpaste,and dozens of other consumer
(21:19):
products. They have beeninvolved since 1932. which kind
of makes me wonder what theystarted with, but they don't say
anything about that in here. Doodoo doo doo pot. Oh, doo doo doo
DuPont. Alright, nevermind. Theythey came in play in 1935. They
(21:40):
are known for their chemicals.
Chemicals for I don't know, itsays chemicals. That's literally
all it says chemicals.
Sean Cooper (21:53):
very descriptive.
Chris Holling (21:54):
Yeah. Science.
There. They've been doingscience since 1935. Then United
Technologies started in theearly 1930s. Which, I mean, I'm
trying to see exactly, it saysinvolved in everything from
elevators to climate control andaerospace systems for aircraft,
(22:15):
and did brief stints on the Dowin the early 1930s. But 1939 was
when it was a solid position onthe index. There you go.
Sean Cooper (22:26):
Okay.
Chris Holling (22:27):
And then finally, 3M, 3M. oh, started in 76.
That's a big gap of 40 years of
Sean Cooper (22:39):
that is a big gap. Well, even though even
the first one, to, the secondone was a big gap.
Chris Holling (22:44):
That's true.
That's true.
So yeah, there you go. Thosethose are the ones that have
been in the Dow the longest. Andthat's, I guess, because we're
talking about it. And whenyou're when you're looking at
things like that, when you'retalking about, like, say 3M, you
know, bottom 3M and what was thefirst thing I said General
Electric, those do, those fit asmore of a passive investing
(23:09):
classification, then like, I getthat, you know, it would be an
active investor that would beutilizing this and it'd be an
active investing choice to makeit but in a way, if you only
purchased that stock, kind oflike you purchase gold or
something of that sort and justhang on to it as its continued
to remain in dow for howeverlong would that be considered a
(23:29):
passive investing process?
Sean Cooper (23:31):
That Yeah, yes, you're
Chris Holling (23:32):
Am I understanding that, okay.
Sean Cooper (23:34):
Yes, yeah, the stock in and of itself is not a
passive or an active investment,it depends entirely on how you
invest in it. So
Chris Holling (23:44):
that makes sense.
Sean Cooper (23:45):
If you if you buy into it, you just buy the stock,
and you hold it for a long time,that would be considered a
passive investment. If you buyan ETF that happens to have so
you buy an ETF that is the DowJones Industrial Average and it
has GE in it, then you're andyou just buy and hold it then it
is a passive investment. But ifyou start if you go out and you
(24:10):
look at GE and you you buy itone day and then sell it a few
days later and then buy it andsell it that same day and you
know, you're being an activeinvestor, day trader in that
case scenario or you hire amutual fund manager, you know,
you invest in a mutual fund, youare hiring that manager and they
are actively trading the stock.
Chris Holling (24:34):
Okay,
Sean Cooper (24:35):
yeah. So, the stock itself has the security itself
has no bearing on whether it'spassive or active. It's all
about how you invest in it.
Chris Holling (24:46):
Well, then let me let me question the norm here.
Then if you do a buy and hold ona real estate property which you
are making an active investmentand renting out and you are
making Active decisions in this,whether it is a property
management process, or if youare the landlord or whatever the
(25:07):
process is, but you hang on toit for 30 years, then is that
passive? Or is it active?
Sean Cooper (25:15):
That would be probably somewhere in between.
Honestly,
Chris Holling (25:18):
Yes,
Andrew Geske (25:19):
if you're if you're holding it for a long
period of time, that wouldclassify as a kind of a passive
investment, but because you'reactively involved in the day to
day decision making of the therental itself, then you know,
that that would be active. So
Chris Holling (25:38):
I just I just wanted to challenge the norm.
Sean Cooper (25:40):
Yeah, I lean more towards active on
that one. But yeah,
Chris Holling (25:43):
okay. All right.
No, I like that. I just, I justwanted to
Sean Cooper (25:47):
that's fair
Chris Holling (25:47):
to poke the bear a little bit. Okay. Well, I
mean, I mean, I think thatclears it up pretty well, for
me. I, I guess that makes sense.
I feel like I understood that,but I never really took the time
to, to think about how differentthe passive versus active is
specifically.
Sean Cooper (26:09):
Yeah.
Chris Holling (26:10):
But what else is, is on there, too. I think we've
we've hit that pretty well, orthe better.
Sean Cooper (26:16):
I mean, I touched briefly on the fact that it's
the fees associated with theactive management that causes it
to not really outperform thepassive management over the
Chris Holling (26:25):
right,
Sean Cooper (26:25):
you know, extended period of time, but to give you
an idea, an exchange tradedFund, the internal expenses of
an exchange traded fund,depending on what you're
investing in, it's going to be awide range you, you know, you
have some of like Vanguard thatare, you know, point 02 percent.
(26:47):
So, ridiculously low,and then you have some that are
Chris Holling (26:48):
sure, that get into that kind of, I
mean, you're getting into moreactive ETFs, which, like I said,
it's kind of strange, but youcan actually get up over 1%. But
generally speaking, ETFsaveraged right around 30 basis
points. So point 3%. Fairly, lowokay.
Sean Cooper (27:11):
And that's a percentage on an annual basis
that you're going to be paying,you don't necessarily see it,
it's disclosed in the prospectusof the fund. It comes out of
your performance. So theperformance that you're quoted
is going to be net of thoseinternal expenses. Conversely,
mutual funds that are typicallyactive Now, like I said, there
(27:32):
are index mutual funds. Vanguardhas some index mutual funds,
that are still much, much lower.
American funds actually is verygood at producing low cost, even
active mutual funds as if as isVanguard, but generally
speaking, your average internalexpense on a mutual fund is
(27:59):
going to be somewhere between 1%and 2%. So you know, more than
three times as much as youraverage index fund or ETF. And
that's, that's just the internalexpenses disclosed in the
prospectus. The prospectusitself doesn't typically
disclose the trading costsassociated with that, because
(28:21):
they can vary so much year toyear, often, that's disclosed in
the statement of additionalinformation. And when you
incorporate the the additionaltrading costs, it typically
increases the average internalexpense of a mutual fund by
about 40%. So which puts youraverage at closer to 1.4 to
2.8%.
Chris Holling (28:41):
When you're when you're talking about these
percents that that are involvedas as fees and such, does that
happen? within the the processof the act of investing? Or does
that happen? At the end of yourtransactions? Does it happen? At
the end, when you pull yourmoney out? Is that when the fee
(29:02):
is implemented? Or how does isthat dependent on the place? Or
how does that work? Do you know?
Sean Cooper (29:06):
So those mutual fund fees are or internal
expenses, the fees associatedwith any of these funds are
going to be ongoing? So you'repaying that on an annual basis?
Chris Holling (29:18):
Okay.
Sean Cooper (29:19):
Yeah, typically, it's going to come out, like
quarterly, maybe monthly, theactual fee. So a piece of that
is going to come out the thetrading costs, you're actually
paying as it as it occurs. Yeah,but the real point here is the
difference between the fees isquite substantial between your
(29:43):
passive management styles andyour active management styles.
And that's why it's verydifficult for those active
managers to actually outperformthe passive strategy. Some of
their you know, if there were nocosts associated with some of
these active management styles.
Over the long term, yes, theywould outperform But
statistically speaking, the feesbasically offset them. Now, that
(30:03):
trait with trading fees goingdown, and the fees associated
with that being compressed somuch in recent years, I haven't
read recent data to incorporatethat. And that may have changed.
That that's at least marginally,especially for some of your
really active funds that have,you know, three or 400% turnover
(30:25):
ratios. So that may change it.
To a degree, I don't know thatit's going to be real
significant, but it certainly isgoing to help the active manager
in that regard, just by reducingthe trading fees. Yeah, that's,
that's all I was gonna, gonnaadd there. There's, there's
(30:46):
reasons for investing in both,there's philosophies behind each
that may or may not speak to youand your, your style and what
you're shooting for.
Chris Holling (31:00):
And no different than what we've talked about
before, it's it's all it's alltools for the toolbox, you know,
Sean Cooper (31:05):
exactly.
Chris Holling (31:05):
That's, it's
Sean Cooper (31:09):
One thing, I'd say. So speaking to that
idea of active trading, activeinvesting, and
Chris Holling (31:17):
sure Yeah,
Sean Cooper (31:18):
buying and selling on a regular basis, that sort of
thing. I talked about the factthat these professional money
managers, you know, basically,they're lucky to offset their
fees and kind of breakeven withthe passive management see, so
you will look at, you know, apassive, s&p 500. And then you
look at an active active managerwho is buying s&p 500 stocks,
Chris Holling (31:41):
right,
Sean Cooper (31:42):
but they're, they're active in their buying
and selling of those stocks inthere. And they're only buying a
subset of those stocks. That'swhat I'm talking about where
they, you know, their theirtrading fees, basically offset,
and they end up kind of breakingeven if you will,
Chris Holling (31:55):
okay.
Sean Cooper (31:56):
However, if you look at the average equity fund
investor, so the, you know,average person just investing
not a professional. They have,on average, regardless of what
decade you look at, theytypically underperformed the
market by something like 6%,five to 6%.
Chris Holling (32:18):
Really,
Sean Cooper (32:19):
yes. And the reason for that is, it's very
psychological, honestly. But itkind of plays to this idea of
active investing, as opposed topassive investing and why the
passive tends to do better. Andthat is, as the market ramps up,
people start to get veryexcited, euphoric, they hear
(32:40):
their friends talking about howmuch money they're making in in
the market they buy, they buymore, and they're buying things
that are very, very expensive.
And then the market tends tocorrect itself and starts to
underperform. And then it startsto go down. And they end up
panicking and selling butthey've, and what they've done
is they've ended up buyingrelatively close to the high and
selling relatively close to thelow. So the average equity fund
(33:04):
investor over the long term onlymakes out about 3.2 3.5%.
Chris Holling (33:13):
That's interesting.
Sean Cooper (33:14):
Anually
Chris Holling (33:14):
That makes sense.
Y
Sean Cooper (33:15):
ou're barely breaking even, you're just
barely beating inflation.
Whereas you know, if you justbaught and hold like the s&p 500
index, you're looking at averageperformance, depending on the
decade of eight to 12%. sodramatic underperformance
depending on you know, whatwe're talking about here. And
(33:36):
the reason for that is peopleare very bad at timing, the
market, they're very bad atbuying at the right time and
selling at the right time,because it requires a psychology
to do what the opposite of whateveryone else is doing when
everyone is panicking. You know,and this Warren Buffett's famous
for saying, I think it's whenever everyone is fearful, be
(33:58):
greedy. And when everyone isoptimistic, or something like
that be fearful. Or wheneveryone's greedy, be fearful.
And the reason for that is aswhen everybody's getting that
euphoric. And there's a frenzyin the markets, that's when you
should be cautious that themarkets going to turn and when
everyone's panicking and sellingout, that's when there's buying
(34:19):
opportunities. But it takes avery, it takes takes a lot to go
against the trend to go againstthe masses from a psychology
standpoint, but that's why theytend to underperform and that's
from a an individual investorstandpoint, not the not
necessarily the professionals,that's where they struggle a lot
(34:40):
is they get it when they becomeactive in their investments. And
even the professionals canstruggle from that because
they're getting pressure fromtheir investors and their
investors are, you know, sellingat the wrong time so they have
no choice but to sell theirunderlying investments in the
funds to create liquidity. So itdoes play into that. But that's
(35:03):
really jumping into thepsychology behind it. So
Chris Holling (35:07):
no, that's that's a really good point. Because not
I mean, not only does thathappen, I've been that guy, I
was that guy a couple years ago.
And I'm just, I'm mostly justdisappointed that, that you're,
you're touching on thephilosophy and psychology of
this stuff, and that it doesn'tit doesn't really give me a job
anymore. So I'll just, I'll justsit here. You know, you can, you
(35:28):
can do the numbers and thephilosophy of the show. And
I'll, I'll just, I'll just showup occasionally and go Yeah. Did
you hear Sean talking to Sean aminute ago? Yeah. Sean really
had a good point when Sean saidthis, and then Sean had another
good point when Sean said this,and isn't Sean great. Everybody.
Ladies gentlemen, It's theSean's?
Sean Cooper (35:51):
No, I actually talked a lot about the
psychology of it in the book.
And I had my my cousin Shaneactually provided me with a
bunch of articles aboutpsychology that I was able to
utilize in discussion on how ourpsyche really impacts our
investing. And also the, youknow, kind of the hysteria of
(36:14):
crowds that that herd effectthat really doesn't help your
investment style.
Chris Holling (36:20):
Maybe we should write a book, we'll have like a
little little section of it,we'll have make sure to check
these facts. And then we can putlike, like the goofy little
paperclip guy that you see onthose old those old word
programs?
Sean Cooper (36:34):
Yeah.
Chris Holling (36:35):
where it's like, did you ever consider that maybe
the philosophy? Alright, we're,I'm totally going off. Maybe
we'll write a book. I'll have mysections and crayon. It'll be
Wow, this, this is good. This isactually had more info than I
was anticipating to be honest.
Which I like I like those. Isthere? Is there anything else
(36:58):
that you think we need to hit onfor that?
Sean Cooper (37:02):
No, I think that that pretty well
covers it. Yeah. I mean, the thegeneral concept between active
and passive management's prettystraightforward. I mean, you hit
on it earlier, but there's lotsof things to consider when it
comes to actively deciding whatstrategy makes the most sense
for you? Or if you're going touse both, and then how much of
both each so.
Chris Holling (37:22):
Right
Sean Cooper (37:23):
And then also the
Chris Holling (37:23):
Tools for the toolbox
Sean Cooper (37:24):
asset classes, you know, with this asset class, do
I want to be a passive investorwith this one? Do I want to be
an active investor, you know,lots of decisions, it's
Chris Holling (37:32):
The decisions are up to you, the listener, the, I
don't know, I'm just I'm talkingto just the air right now. So
that's, that's fine. They'relistening. The listeners are
listening. With their, theirlistening ears. Right now. I
should stop talking. Thank you.
Thank you again, for joining uson another episode of the truth
(37:54):
about investing back to basics.
Thank you for taking the time towant to better yourself and
coming here for more tools forthe toolbox. My name is Chris
Holling.
Sean Cooper (38:06):
And I'm Sean Cooper.
Chris Holling (38:08):
And we will permit you to be the listener
again. Next time. That was thatwas kind of better.
Sean Cooper (38:19):
I don't know about the permit.
Chris Holling (38:21):
I'm allowing.
We're allowing
Sean Cooper (38:24):
okay,
Chris Holling (38:25):
My my listening peastants
Sean Cooper (38:27):
Okay, I think by putting it up there we have
pretty much.
Chris Holling (38:38):
podcast disclaimer disclaimer. The
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that is required for thispodcast to be up and running and
fully functioning and movingforward. This is going to be the
same disclaimer that you willhear in each one of our
episodes. We hope you enjoy itjust as much as we enjoyed
(38:59):
making.
Sean Cooper (39:01):
All content on this podcast and accompanying
transcript is for informationpurposes only. opinions
expressed here in by Sean Cooperare solely those of fit
financial consulting LLC unlessotherwise specifically cited.
ChrisHolling is not affiliatedwith fit financial consulting,
LLC nor do the views expressedby Chris Holling represent the
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(39:23):
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(39:46):
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(40:08):
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(40:31):
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Chris Holling (40:45):
Okay, why, why why do cow milking stools only
have three legs?
Sean Cooper (40:54):
because they like to see you fall over?
Chris Holling (40:56):
No, because the cow has the utter
Sean Cooper (41:02):
I'll have to tell that one to Anastasia.
Chris Holling (41:05):
What happens when it rains cats and dogs?
Sean Cooper (41:10):
You shouldnt go outside because it will hurt
Chris Holling (41:13):
no you step in poodles do you actually know
where that term came from. Likewhere that where that comes
from?
Sean Cooper (41:20):
The term poodle.
Chris Holling (41:21):
No.
Sean Cooper (41:23):
raining cats or dogs.
Chris Holling (41:24):
Yeah. Yeah.
Sean Cooper (41:26):
No, I don't.
Chris Holling (41:28):
It comes from when houses we're still had,
like straw and combinations ofstraw and mud.
Sean Cooper (41:39):
Okay,
Chris Holling (41:39):
just not like roof shingles holding the roof
together. And so when theanimals
Sean Cooper (41:45):
thatched roof
Chris Holling (41:45):
outside, yeah, yeah, thatched roof when the
animals were hanging outside andthey were climbing around and
hanging out on top because itwas a comfy place to sit because
of the straw and differentthings and it would rain it
would become slippery and they'dliterally fall off the roof and
be raining cats and dogs.
Sean Cooper (42:00):
Interesting.
Hopefully, itonly took once for them to learn
that lesson.
Chris Holling (42:09):
Based on the types of decisions and mistakes
I've made in my life, I thinkit's fair to say at least some
of the animals forgot and we'reright back up there again.
Sean Cooper (42:18):
Yep, that's fair.
Oh, how do we, how do we start this one?
Sean Cooper (00:08):
active versus passive management there, it's
began. Actually, maybe we shouldintroduce ourselves.
Chris Holling (00:18):
Such a, like, I'm just gonna drop this plate in
front of you like here. Eat it?
Sean Cooper (00:22):
Yep.
Chris Holling (00:23):
Hope you like is ready.
Yeah, yeah, yeah. Today Todaytoday Hey, welcome, welcome.
(00:43):
Welcome, ladies and gentlemen,boys and girls to another
episode of the truth aboutinvesting back to basics. My
name is Chris Holling.
Sean Cooper (00:52):
And I'm Sean Cooper.
Chris Holling (00:54):
And we are going to talk about what did you say?
Sean Cooper (00:57):
active versus passive management.
Chris Holling (00:59):
Look at that, we are going to talk about that.
And let's, let's do the thingthat we've been doing this
season where I describe what Iunderstand about it. And then
you tell me if I'm wrong. Tellme how wrong I am.
Sean Cooper (01:16):
It's a lot of fun.
Chris Holling (01:17):
Yeah, you know, actually, this one, I feel like
as far as just general concepts,I feel like I understand this
one. The least I feel like Ifeel like I just have a base
understanding of this one when Ithink of passive and active
investing. To me. And I think asI'm saying this, I'm kind of
(01:38):
forming my thought, I think thereason that comes off this way
to me is because I'm more of aconsumer than I am anything else
on this. So when I think ofpassive and active investing, I
think of I have a certain amountof money that I might hand to an
investing firm, or say a certainamount of precious metals that
(02:02):
I'm sitting on, and I hang on toit, and I kind of allow the
market to happen. And when it istime to sell roughly around that
time, I hope that my amountshave grown and gotten to a
certain point over let's say 20years, and sell and set up my my
(02:25):
wins and losses. However,however you want to look at it,
and hopefully through acombination of inflation and
interest. And however I havethat arranged that. That's what
I acquire whereas activeinvesting, I like I immediately
think of like day trading stockswhere it's like, it's it's a
high price now I'm going to sellit now. Okay, now let's go Okay,
(02:46):
now I'm going to and you'redoing it throughout the course
of the day. And I I'm sure thatthat's not exactly it. But those
are the two extremes that sit inmy head especially is like a
consumer view. So how, how faroff base? Am I on that?
Sean Cooper (03:01):
Not not too far, really. I would say your
description of you know, kind ofbuying and holding precious
metals, that would definitelyfall on under passive. So you
had that one down, Pat.
Chris Holling (03:13):
See that down Pat. You heard it from the guy?
Sean Cooper (03:15):
Yep
Chris Holling (03:16):
man.
Sean Cooper (03:16):
Yep
Chris Holling (03:17):
on record,
Sean Cooper (03:18):
the the stock trading day trading, that would
be an example of activemanagement, handing it over to a
professional money manager.
While a passive approach fromyour standpoint, as an investor
it still would still beconsidered active management
because most likely thatprofessional money manager is
(03:40):
going to be actively managingyour portfolio.
Chris Holling (03:45):
I wondered about that. I hesitated saying it, but
I I'm okay with being wrong onon public internet waves.
Sean Cooper (03:55):
So I mean, it does depend on the manager. So in
general terms, active managementreally just means typically
you're hiring some professionalmoney manager to do it for you.
The other example would be is ifyou're actively buying and
selling on a more regular basis,like you were describing with
(04:16):
the the day trader, the stocktrader, whereas passive
management is typically a buyand hold strategy, you might
rebalance periodically, probablya good idea to do so. And it
would still be typicallyclassified as passive
management. Even if you'rerebalancing say a couple times a
year or once every couple years,that sort of thing. From a
(04:39):
investment standpoint, so whatyou're actually looking at when
you are investing in a an activemanager versus a passive
manager, typically speaking,most mutual funds and hedge
funds would be classified asactive management. So there's
some professional money manageroverseeing the funds inside of
(05:00):
that mutual fund, they're goingto be the ones making the buy
and sell decisions. And they'retypically going to be fairly
active about it. Whereas on thepassive side, you're looking at
index funds. So it's still amutual fund, but it's tied to an
index. So there's not someprofessional money manager
overseeing and making buy andsell decisions. It's just a
(05:21):
matter of are these holdings inthe index as it has this
holding, fallen out of the indexgone into the index, and you're
only really buying and sellingwhen that happens? Or to
potentially rebalance?
Chris Holling (05:33):
Okay, sorry, what's, what's an index?
Sean Cooper (05:35):
an index, So people often quote like the s&p 500?
Chris Holling (05:40):
OK
Sean Cooper (05:40):
is an index, the Russell 2000 is an index, the
eafe is an index. It's just abasket of in this case, what are
the examples I gave stocks?
Chris Holling (05:54):
Sure
Sean Cooper (05:55):
Barclays Capital aggregate bond index would be
another one bar cap agg,
Chris Holling (06:00):
sure
Sean Cooper (06:02):
so there are certain requirements for a a
security to fit the profile ofthat index, and basically either
fits or it does not fit. s&p 500is just the 500 largest
capitalized stocks in the US. Soeither you're in the top 500, or
you're not there's you don'tneed any experts to make buy and
(06:25):
sell decisions based on thatyou're just tracking index.
Chris Holling (06:30):
I have a question that's probably going to take
you off topic.
Sean Cooper (06:33):
Okay.
Chris Holling (06:35):
Do you happen to know off the top of your head?
What company or like a couple ofcompanies that have been in the
500? The longest just out ofcuriosity?
Sean Cooper (06:45):
That I do not?
Chris Holling (06:46):
I'm just curious.
I don't know. I just, I justwondered.
Sean Cooper (06:51):
No, that's a great question. That the biggest ones
are in in it now are all prettymuch tech and they were have not
been in it very long at all. Butif you want if you want a longer
track record in the index you'dwant to look at would be the Dow
Jones Industrial Average,because that's been around
longer, and that has some veryold companies in it.
Chris Holling (07:12):
Okay. Okay.
Sean Cooper (07:14):
Yeah,
Chris Holling (07:14):
I was just I was just curious if you just knew
something off the top of yourhead.
Sean Cooper (07:17):
Nope, not particularly.
Chris Holling (07:20):
Well, sorry.
listeners. Go. Figure it out.
Sean Cooper (07:25):
Yep. Chris, you can look it up while I keep blabbing
on about passive investing.
Chris Holling (07:30):
Okay, I'm gonna I'm gonna try I'm gonna try the
the researching and edit out allmy angry typing later.
Sean Cooper (07:37):
Okay. I don't know why its angry typing, but sure,
Chris Holling (07:40):
because it's, it's not here. That's how it
sounds. Sorry. Okay, you goahead. And I will be researching
as you continue describing,
Sean Cooper (07:50):
okay, so ETFs, or exchange traded funds are also
typically passive investments,because typically, they're also
tracking a an index, orsomething along those lines,
there are some active ETFs. Theidea of an active ETF is kind of
strange. But that's anothertopic entirely. As far as the
(08:17):
kind of pros and cons of each,the idea behind active
management is that you'reprof... paying this professional
money manager, ideally to eitherenhanced your performance or
reduce your risk withoutsacrificing performance in some
way, shape or form. That that'sthe concept anyway, active
(08:44):
management does tend to, or atleast has a better chance of
outperforming when the market isvery volatile, especially a
volatile market going sideways.
same holds true for a bearmarket, so market in decline.
Whereas passive management tendsto outperform during a bull
market, it's very difficult foran active manager to outperform
(09:06):
a bull market. What the studieshave found is that over the long
term, passive management tendsto outperform anyway. And the
reason being is the activemanagers, the even even the very
good ones, over the extendedperiod of time. If they do well
tend to basically offset theirfees and the fees of trading. So
(09:33):
they essentially breakeven. Now,there are obvious, obviously
exceptions to that. However, thenumber of exceptions, doesn't
actually exceed what you wouldexpect from basically from just
random chance, if you will. Atleast from the you know, The
(09:56):
statistical level, and that'swhat we see coming out of the
big institutions. So,
Chris Holling (10:04):
okay, okay, I got I got good news and I got bad
news. Okay. The good news is, Ifinished my research,
Sean Cooper (10:12):
nice work.
Chris Holling (10:13):
The bad news is that I was not able to research
and listen to yousimultaneously. So I need you to
give me like, a 10 secondsynopsis of what you just said,
that I need the crash course Ineed the, I need the like, this
is what I said I go, okay.
Sean Cooper (10:34):
Okay.
Chris Holling (10:35):
Ready? Go.
Sean Cooper (10:36):
Okay, the idea behind active management is to
provide some form ofoutperformance either actual
better returns or lower risk.
And they tend to do better hasthe opportunity to do better
during a volatile sidewaysmarket or a bear market, whereas
passive investing tends to dobetter outperform in a bull
market. The statistics show thatthe active managers typically
(11:01):
cannot do anything more thanjust break even with the long
term.
Chris Holling (11:09):
No, no, no, no, that's 30 seconds. That's 30
seconds. I need I need the thethe 10 second five year old
explanation, because now I'mjust curious what you're gonna
say. That's how we're gonna
Sean Cooper (11:21):
eh. But if I give you 10 more seconds, that's just
adding 10 seconds
Chris Holling (11:25):
total, like you're starting over but only
have 10 seconds.
Sean Cooper (11:32):
I don't know that I could shorten it that much.
Chris Holling (11:35):
Oh, you're sure you could.
Sean Cooper (11:37):
active managers goal is to outperform in some
way, shape or form. Butstatistically, it typically does
not.
Chris Holling (11:46):
Nice.
Okay, five seconds.
Sean Cooper (11:49):
No.
Chris Holling (11:53):
Okay. No, that's, that's, that's fair. Because
it's, that's that's important tonote. Because if you're if
you're looking at that as a, asa whole, and you're, it kind of
goes back into some of the stuffthat we're we're talking about.
And I hope I addressed thisproperly, because I, I was doing
what I could to pay attentionsimultaneously. But when when we
(12:16):
are looking at those things, andwhen you're talking about the
differences between the two, itkind of goes back to what we
were talking about of comparisonof inflation to interest. And
that's why we started with itand why we opened with some of
those things, to talk about someof the comparisons that it's
good to do something and chancesare as you're addressing the,
(12:36):
the active portion is going tooutperform the two which is
which is why it's good to learnabout these things and get
involved.
Sean Cooper (12:43):
Over the long term, the passive actually outperforms
the two
Chris Holling (12:49):
shoot, well, then that completely disrupts
everything I just said
Sean Cooper (12:53):
the issue the active portion has is typically
speaking, the any outperformancethat it experiences is offset by
the higher fees associated withpaying the professional money
manager and paying for all thetrading costs that come in, in
with the active management. Now,there are a few exceptions to
(13:15):
that, like I said, just frompure sis statistical chance
there are exceptions to that.
But there are also exceptions asyou get into asset classes. And
what I mean by that is, the moreefficient a market is the more
efficient an asset class is, theharder it is for an active
manager to beat just a passiveindex. So for example, domestic
(13:36):
equities, even as you get downto small cap or mid cap or small
cap, whether you're do growth,growth or value, it doesn't
really make a difference. It'smuch harder for an active
manager to outperform those inthose asset classes. Because the
market is so efficient, anyother type of even bonds or
(14:00):
other international equities solike investing in Europe, again,
it's a very, they're veryefficient markets. So it's very
hard to take advantage of anytype of imbalances in terms of,
you know, things beingundervalued or overvalued, and
(14:24):
things of that nature, where yousee active management tend to do
a bit better. bond markets whereright, I mean, right now,
technically speaking, an activemanager should have the
potential to do better, becausewe're okay, maybe not right now,
but going forward where we'refacing a rising interest rate
(14:49):
market, which is going to havedownward pressure on bond
prices. An active manager shouldbe able to beat a passive fund
because the passive fund isbasically just going to continue
to get hit by those risinginterest rates, but then being
offset by the better interestrate down the road. Other things
like uh emerging markets orfrontier markets, where actually
(15:10):
investing in those marketsbecomes very cumbersome, just
because of the regulations. Andthe way you have to go through
the process of creating, evencreating an index becomes a
challenge. So an active managermay have the opportunity to take
advantage of those differentvaluations. same holds true with
(15:31):
some alternative asset classes.
So for example, managed futures,for example, there's no easy way
to wrap that that concept into apassive investment, to put it
into some form of passive ETF,it just, conceptually, it
(15:53):
doesn't work very well. So thereare instances where it can
certainly be advantageous tohave that active manager. And
again, you know, depending onthe market cycle, there are
other reasons why they mighthave a better opportunity to
outperform. But broadlyspeaking, statistically
speaking, if you look at thestudies coming out of, you know,
(16:15):
your big institutions Harvardand Yale, and those active
managers typically underperformor basically just offset their
own fees.
Chris Holling (16:28):
Okay, that makes sense. I is that is that why?
How do I put this is that whywhen discussing these as a as a
base, understand me just as a asa consumer, that I don't know
anything about investing and,and stuff like that, is that a
big reason why diversifying yourportfolio and, and things along
(16:51):
those lines is is encouraged,because then you have sort of
that that offset of the passiveinvesting that's doing well in
those consistent markets andindexes, like you're talking
about, as well as when there isa dip and there is a change, and
the active investors have thatopportunity to, in theory do
well statistically, like you'rereferring to and then and then
(17:12):
take advantage of those, thosetimes when those are available.
Is that why that's encouraged?
Or is there a differentreasoning different thought
process on that?
Sean Cooper (17:21):
There's certainly that's certainly a form of
diversification. Typicallyspeaking, when people talk about
diversification, they'reactually referring to asset
classes by asset class, notnecessarily by management style.
However, that is certainly aform of diversification. And
typically, what you see withthat is people will use like a,
(17:42):
what they call a core andexplore strategy. So they'll
have a strategically diversifiedcore of their portfolio, call it
60% 70% 80%. That isstrategically allocated, they're
going to buy and hold, they'regoing to use it as a passive,
passive investment rebalancedperiodically, and then depending
(18:04):
on what they're they're willingto, potentially, in some cases,
risk, depending on what they'reusing for that explore, piece.
That other piece of the pie thatyou know, 10, 20, 30, 40%,
whatever it is, ends up beingused. Oftentimes, it's in a more
(18:27):
aggressive fashion. So it mightbe in something that has a bit
more risk. But also potentiallymore reward.
Chris Holling (18:37):
Well, no, that's, and I'm sorry, I'm cutting you
off here. But I'm, I'm doing twothings partially, because the
that's that's why I was askingwas the high risk versus low
risk, if you're looking atsomething that's high risk,
where it's technically somebodythat's active versus the low
risk is something that'sestablished, and it's slow, and
over time, like you were talkingabout a little bit earlier. And
(18:58):
the other reason I'm stoppingyou is because unless we're
going to dive into it right now,correlation, diversification is
our next episode. And
Sean Cooper (19:08):
that should definitely be its own
own episode.
Chris Holling (19:10):
Okay. Okay, cool. I'm just, I'm just taking
the reins in cause That's myjob.
Sean Cooper (19:16):
No, no, the one other thing I would
I would add is, you know, inthis particular example,
depending on how you're using anactive manager, they may
actually be used as more of aconservative play. So that
Explorer is actually aconservative piece of the
portfolio, you're using it forprotection, because you're
(19:36):
hoping that active manager isactually going to do better when
the markets do poorly. So it'snot always a an aggressive play
a risky play, but it's just moreoften used the other way.
Chris Holling (19:53):
Okay, yeah, that makes sense.
Sean Cooper (19:56):
So, what did you find?
Chris Holling (19:59):
Oh, thank you. Look at you keeping
me on track, I was not able tofind S&P that was, specifically
that's what I was interested inbecause I thought, you know, the
top 500, who's been in the top500 the longest, but I just I
just had a hard time finding it.
But what I did find is the sixstocks that have been in the Dow
(20:21):
the longest,
Sean Cooper (20:22):
perfect.
Chris Holling (20:23):
And now I mean, I really just googled this and
this this was just the, the hotbutton that I picked here. So
you know, always always checkyour sources and bla bla bla bla
bla bla bla, but this is fromfool.com The Motley Fool. I've
Never heard of it. Oh, you knowit. Okay.
Sean Cooper (20:41):
Yes.
Chris Holling (20:42):
Cool. So it looks like the number one that's on
here is General Electric.
Sean Cooper (20:48):
Oh, that's not surprising
Chris Holling (20:49):
General Electric has been in the index since
1896. Actually.
Sean Cooper (20:54):
Alright, that's not quite as long as I would have
expected but
Chris Holling (20:57):
Oh, no. Okay.
Then followed by that is ExxonMobil, which is 1928. When they
got on there, then Procter andGamble, which I don't know any
of these things, so they areperhaps best known for tide
detergent, crest, toothpaste,and dozens of other consumer
(21:19):
products. They have beeninvolved since 1932. which kind
of makes me wonder what theystarted with, but they don't say
anything about that in here. Doodoo doo doo pot. Oh, doo doo doo
DuPont. Alright, nevermind. Theythey came in play in 1935. They
(21:40):
are known for their chemicals.
Chemicals for I don't know, itsays chemicals. That's literally
all it says chemicals.
Sean Cooper (21:53):
very descriptive.
Chris Holling (21:54):
Yeah. Science.
There. They've been doingscience since 1935. Then United
Technologies started in theearly 1930s. Which, I mean, I'm
trying to see exactly, it saysinvolved in everything from
elevators to climate control andaerospace systems for aircraft,
(22:15):
and did brief stints on the Dowin the early 1930s. But 1939 was
when it was a solid position onthe index. There you go.
Sean Cooper (22:26):
Okay.
Chris Holling (22:27):
And then finally, 3M, 3M. oh, started in 76.
That's a big gap of 40 years of
Sean Cooper (22:39):
that is a big gap. Well, even though even
the first one, to, the secondone was a big gap.
Chris Holling (22:44):
That's true.
That's true.
So yeah, there you go. Thosethose are the ones that have
been in the Dow the longest. Andthat's, I guess, because we're
talking about it. And whenyou're when you're looking at
things like that, when you'retalking about, like, say 3M, you
know, bottom 3M and what was thefirst thing I said General
Electric, those do, those fit asmore of a passive investing
(23:09):
classification, then like, I getthat, you know, it would be an
active investor that would beutilizing this and it'd be an
active investing choice to makeit but in a way, if you only
purchased that stock, kind oflike you purchase gold or
something of that sort and justhang on to it as its continued
to remain in dow for howeverlong would that be considered a
(23:29):
passive investing process?
Sean Cooper (23:31):
That Yeah, yes, you're
Chris Holling (23:32):
Am I understanding that, okay.
Sean Cooper (23:34):
Yes, yeah, the stock in and of itself is not a
passive or an active investment,it depends entirely on how you
invest in it. So
Chris Holling (23:44):
that makes sense.
Sean Cooper (23:45):
If you if you buy into it, you just buy the stock,
and you hold it for a long time,that would be considered a
passive investment. If you buyan ETF that happens to have so
you buy an ETF that is the DowJones Industrial Average and it
has GE in it, then you're andyou just buy and hold it then it
is a passive investment. But ifyou start if you go out and you
(24:10):
look at GE and you you buy itone day and then sell it a few
days later and then buy it andsell it that same day and you
know, you're being an activeinvestor, day trader in that
case scenario or you hire amutual fund manager, you know,
you invest in a mutual fund, youare hiring that manager and they
are actively trading the stock.
Chris Holling (24:34):
Okay,
Sean Cooper (24:35):
yeah. So, the stock itself has the security itself
has no bearing on whether it'spassive or active. It's all
about how you invest in it.
Chris Holling (24:46):
Well, then let me let me question the norm here.
Then if you do a buy and hold ona real estate property which you
are making an active investmentand renting out and you are
making Active decisions in this,whether it is a property
management process, or if youare the landlord or whatever the
(25:07):
process is, but you hang on toit for 30 years, then is that
passive? Or is it active?
Sean Cooper (25:15):
That would be probably somewhere in between.
Honestly,
Chris Holling (25:18):
Yes,
Andrew Geske (25:19):
if you're if you're holding it for a long
period of time, that wouldclassify as a kind of a passive
investment, but because you'reactively involved in the day to
day decision making of the therental itself, then you know,
that that would be active. So
Chris Holling (25:38):
I just I just wanted to challenge the norm.
Sean Cooper (25:40):
Yeah, I lean more towards active on
that one. But yeah,
Chris Holling (25:43):
okay. All right.
No, I like that. I just, I justwanted to
Sean Cooper (25:47):
that's fair
Chris Holling (25:47):
to poke the bear a little bit. Okay. Well, I
mean, I mean, I think thatclears it up pretty well, for
me. I, I guess that makes sense.
I feel like I understood that,but I never really took the time
to, to think about how differentthe passive versus active is
specifically.
Sean Cooper (26:09):
Yeah.
Chris Holling (26:10):
But what else is, is on there, too. I think we've
we've hit that pretty well, orthe better.
Sean Cooper (26:16):
I mean, I touched briefly on the fact that it's
the fees associated with theactive management that causes it
to not really outperform thepassive management over the
Chris Holling (26:25):
right,
Sean Cooper (26:25):
you know, extended period of time, but to give you
an idea, an exchange tradedFund, the internal expenses of
an exchange traded fund,depending on what you're
investing in, it's going to be awide range you, you know, you
have some of like Vanguard thatare, you know, point 02 percent.
(26:47):
So, ridiculously low,and then you have some that are
Chris Holling (26:48):
sure, that get into that kind of, I
mean, you're getting into moreactive ETFs, which, like I said,
it's kind of strange, but youcan actually get up over 1%. But
generally speaking, ETFsaveraged right around 30 basis
points. So point 3%. Fairly, lowokay.
Sean Cooper (27:11):
And that's a percentage on an annual basis
that you're going to be paying,you don't necessarily see it,
it's disclosed in the prospectusof the fund. It comes out of
your performance. So theperformance that you're quoted
is going to be net of thoseinternal expenses. Conversely,
mutual funds that are typicallyactive Now, like I said, there
(27:32):
are index mutual funds. Vanguardhas some index mutual funds,
that are still much, much lower.
American funds actually is verygood at producing low cost, even
active mutual funds as if as isVanguard, but generally
speaking, your average internalexpense on a mutual fund is
(27:59):
going to be somewhere between 1%and 2%. So you know, more than
three times as much as youraverage index fund or ETF. And
that's, that's just the internalexpenses disclosed in the
prospectus. The prospectusitself doesn't typically
disclose the trading costsassociated with that, because
(28:21):
they can vary so much year toyear, often, that's disclosed in
the statement of additionalinformation. And when you
incorporate the the additionaltrading costs, it typically
increases the average internalexpense of a mutual fund by
about 40%. So which puts youraverage at closer to 1.4 to
2.8%.
Chris Holling (28:41):
When you're when you're talking about these
percents that that are involvedas as fees and such, does that
happen? within the the processof the act of investing? Or does
that happen? At the end of yourtransactions? Does it happen? At
the end, when you pull yourmoney out? Is that when the fee
(29:02):
is implemented? Or how does isthat dependent on the place? Or
how does that work? Do you know?
Sean Cooper (29:06):
So those mutual fund fees are or internal
expenses, the fees associatedwith any of these funds are
going to be ongoing? So you'repaying that on an annual basis?
Chris Holling (29:18):
Okay.
Sean Cooper (29:19):
Yeah, typically, it's going to come out, like
quarterly, maybe monthly, theactual fee. So a piece of that
is going to come out the thetrading costs, you're actually
paying as it as it occurs. Yeah,but the real point here is the
difference between the fees isquite substantial between your
(29:43):
passive management styles andyour active management styles.
And that's why it's verydifficult for those active
managers to actually outperformthe passive strategy. Some of
their you know, if there were nocosts associated with some of
these active management styles.
Over the long term, yes, theywould outperform But
statistically speaking, the feesbasically offset them. Now, that
(30:03):
trait with trading fees goingdown, and the fees associated
with that being compressed somuch in recent years, I haven't
read recent data to incorporatethat. And that may have changed.
That that's at least marginally,especially for some of your
really active funds that have,you know, three or 400% turnover
(30:25):
ratios. So that may change it.
To a degree, I don't know thatit's going to be real
significant, but it certainly isgoing to help the active manager
in that regard, just by reducingthe trading fees. Yeah, that's,
that's all I was gonna, gonnaadd there. There's, there's
(30:46):
reasons for investing in both,there's philosophies behind each
that may or may not speak to youand your, your style and what
you're shooting for.
Chris Holling (31:00):
And no different than what we've talked about
before, it's it's all it's alltools for the toolbox, you know,
Sean Cooper (31:05):
exactly.
Chris Holling (31:05):
That's, it's
Sean Cooper (31:09):
One thing, I'd say. So speaking to that
idea of active trading, activeinvesting, and
Chris Holling (31:17):
sure Yeah,
Sean Cooper (31:18):
buying and selling on a regular basis, that sort of
thing. I talked about the factthat these professional money
managers, you know, basically,they're lucky to offset their
fees and kind of breakeven withthe passive management see, so
you will look at, you know, apassive, s&p 500. And then you
look at an active active managerwho is buying s&p 500 stocks,
Chris Holling (31:41):
right,
Sean Cooper (31:42):
but they're, they're active in their buying
and selling of those stocks inthere. And they're only buying a
subset of those stocks. That'swhat I'm talking about where
they, you know, their theirtrading fees, basically offset,
and they end up kind of breakingeven if you will,
Chris Holling (31:55):
okay.
Sean Cooper (31:56):
However, if you look at the average equity fund
investor, so the, you know,average person just investing
not a professional. They have,on average, regardless of what
decade you look at, theytypically underperformed the
market by something like 6%,five to 6%.
Chris Holling (32:18):
Really,
Sean Cooper (32:19):
yes. And the reason for that is, it's very
psychological, honestly. But itkind of plays to this idea of
active investing, as opposed topassive investing and why the
passive tends to do better. Andthat is, as the market ramps up,
people start to get veryexcited, euphoric, they hear
(32:40):
their friends talking about howmuch money they're making in in
the market they buy, they buymore, and they're buying things
that are very, very expensive.
And then the market tends tocorrect itself and starts to
underperform. And then it startsto go down. And they end up
panicking and selling butthey've, and what they've done
is they've ended up buyingrelatively close to the high and
selling relatively close to thelow. So the average equity fund
(33:04):
investor over the long term onlymakes out about 3.2 3.5%.
Chris Holling (33:13):
That's interesting.
Sean Cooper (33:14):
Anually
Chris Holling (33:14):
That makes sense.
Y
Sean Cooper (33:15):
ou're barely breaking even, you're just
barely beating inflation.
Whereas you know, if you justbaught and hold like the s&p 500
index, you're looking at averageperformance, depending on the
decade of eight to 12%. sodramatic underperformance
depending on you know, whatwe're talking about here. And
(33:36):
the reason for that is peopleare very bad at timing, the
market, they're very bad atbuying at the right time and
selling at the right time,because it requires a psychology
to do what the opposite of whateveryone else is doing when
everyone is panicking. You know,and this Warren Buffett's famous
for saying, I think it's whenever everyone is fearful, be
(33:58):
greedy. And when everyone isoptimistic, or something like
that be fearful. Or wheneveryone's greedy, be fearful.
And the reason for that is aswhen everybody's getting that
euphoric. And there's a frenzyin the markets, that's when you
should be cautious that themarkets going to turn and when
everyone's panicking and sellingout, that's when there's buying
(34:19):
opportunities. But it takes avery, it takes takes a lot to go
against the trend to go againstthe masses from a psychology
standpoint, but that's why theytend to underperform and that's
from a an individual investorstandpoint, not the not
necessarily the professionals,that's where they struggle a lot
(34:40):
is they get it when they becomeactive in their investments. And
even the professionals canstruggle from that because
they're getting pressure fromtheir investors and their
investors are, you know, sellingat the wrong time so they have
no choice but to sell theirunderlying investments in the
funds to create liquidity. So itdoes play into that. But that's
(35:03):
really jumping into thepsychology behind it. So
Chris Holling (35:07):
no, that's that's a really good point. Because not
I mean, not only does thathappen, I've been that guy, I
was that guy a couple years ago.
And I'm just, I'm mostly justdisappointed that, that you're,
you're touching on thephilosophy and psychology of
this stuff, and that it doesn'tit doesn't really give me a job
anymore. So I'll just, I'll justsit here. You know, you can, you
(35:28):
can do the numbers and thephilosophy of the show. And
I'll, I'll just, I'll just showup occasionally and go Yeah. Did
you hear Sean talking to Sean aminute ago? Yeah. Sean really
had a good point when Sean saidthis, and then Sean had another
good point when Sean said this,and isn't Sean great. Everybody.
Ladies gentlemen, It's theSean's?
Sean Cooper (35:51):
No, I actually talked a lot about the
psychology of it in the book.
And I had my my cousin Shaneactually provided me with a
bunch of articles aboutpsychology that I was able to
utilize in discussion on how ourpsyche really impacts our
investing. And also the, youknow, kind of the hysteria of
(36:14):
crowds that that herd effectthat really doesn't help your
investment style.
Chris Holling (36:20):
Maybe we should write a book, we'll have like a
little little section of it,we'll have make sure to check
these facts. And then we can putlike, like the goofy little
paperclip guy that you see onthose old those old word
programs?
Sean Cooper (36:34):
Yeah.
Chris Holling (36:35):
where it's like, did you ever consider that maybe
the philosophy? Alright, we're,I'm totally going off. Maybe
we'll write a book. I'll have mysections and crayon. It'll be
Wow, this, this is good. This isactually had more info than I
was anticipating to be honest.
Which I like I like those. Isthere? Is there anything else
(36:58):
that you think we need to hit onfor that?
Sean Cooper (37:02):
No, I think that that pretty well
covers it. Yeah. I mean, the thegeneral concept between active
and passive management's prettystraightforward. I mean, you hit
on it earlier, but there's lotsof things to consider when it
comes to actively deciding whatstrategy makes the most sense
for you? Or if you're going touse both, and then how much of
both each so.
Chris Holling (37:22):
Right
Sean Cooper (37:23):
And then also the
Chris Holling (37:23):
Tools for the toolbox
Sean Cooper (37:24):
asset classes, you know, with this asset class, do
I want to be a passive investorwith this one? Do I want to be
an active investor, you know,lots of decisions, it's
Chris Holling (37:32):
The decisions are up to you, the listener, the, I
don't know, I'm just I'm talkingto just the air right now. So
that's, that's fine. They'relistening. The listeners are
listening. With their, theirlistening ears. Right now. I
should stop talking. Thank you.
Thank you again, for joining uson another episode of the truth
(37:54):
about investing back to basics.
Thank you for taking the time towant to better yourself and
coming here for more tools forthe toolbox. My name is Chris
Holling.
Sean Cooper (38:06):
And I'm Sean Cooper.
Chris Holling (38:08):
And we will permit you to be the listener
again. Next time. That was thatwas kind of better.
Sean Cooper (38:19):
I don't know about the permit.
Chris Holling (38:21):
I'm allowing.
We're allowing
Sean Cooper (38:24):
okay,
Chris Holling (38:25):
My my listening peastants
Sean Cooper (38:27):
Okay, I think by putting it up there we have
pretty much.
Chris Holling (38:38):
podcast disclaimer disclaimer. The
disclaimer following thisdisclaimer, is the disclaimer
that is required for thispodcast to be up and running and
fully functioning and movingforward. This is going to be the
same disclaimer that you willhear in each one of our
episodes. We hope you enjoy itjust as much as we enjoyed
(38:59):
making.
Sean Cooper (39:01):
All content on this podcast and accompanying
transcript is for informationpurposes only. opinions
expressed here in by Sean Cooperare solely those of fit
financial consulting LLC unlessotherwise specifically cited.
ChrisHolling is not affiliatedwith fit financial consulting,
LLC nor do the views expressedby Chris Holling represent the
views of fit financialconsulting LLC. This podcast is
(39:23):
intended to be used in itsentirety. Any other use beyond
its author's intent distributionor copying of the contents of
this podcast is strictlyprohibited. Nothing in this
podcast is intended as legalaccounting or tax advice, and is
for informational purposes only.
All information or ideasprovided should be discussed in
detail with an advisor,accountant or legal counsel
prior to implementation. Thispodcast may reference links to
(39:46):
websites for the convenience ofour users. Our firm has no
control over the accuracy orcontent of these other websites.
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(40:08):
persons of another jurisdictionunless otherwise permitted by
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personalized investment advicefor compensation shall not be
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or pursuant to an applicablestate exemption for information
concerning the status ordisciplinary history of a broker
(40:31):
dealer, investment advisor ortheir representatives. The
consumer should contact theirstate securities administrator.
Chris Holling (40:45):
Okay, why, why why do cow milking stools only
have three legs?
Sean Cooper (40:54):
because they like to see you fall over?
Chris Holling (40:56):
No, because the cow has the utter
Sean Cooper (41:02):
I'll have to tell that one to Anastasia.
Chris Holling (41:05):
What happens when it rains cats and dogs?
Sean Cooper (41:10):
You shouldnt go outside because it will hurt
Chris Holling (41:13):
no you step in poodles do you actually know
where that term came from. Likewhere that where that comes
from?
Sean Cooper (41:20):
The term poodle.
Chris Holling (41:21):
No.
Sean Cooper (41:23):
raining cats or dogs.
Chris Holling (41:24):
Yeah. Yeah.
Sean Cooper (41:26):
No, I don't.
Chris Holling (41:28):
It comes from when houses we're still had,
like straw and combinations ofstraw and mud.
Sean Cooper (41:39):
Okay,
Chris Holling (41:39):
just not like roof shingles holding the roof
together. And so when theanimals
Sean Cooper (41:45):
thatched roof
Chris Holling (41:45):
outside, yeah, yeah, thatched roof when the
animals were hanging outside andthey were climbing around and
hanging out on top because itwas a comfy place to sit because
of the straw and differentthings and it would rain it
would become slippery and they'dliterally fall off the roof and
be raining cats and dogs.
Sean Cooper (42:00):
Interesting.
Hopefully, itonly took once for them to learn
that lesson.
Chris Holling (42:09):
Based on the types of decisions and mistakes
I've made in my life, I thinkit's fair to say at least some
of the animals forgot and we'reright back up there again.
Sean Cooper (42:18):
Yep, that's fair.
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