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Josh Brown Is Sick And Tired Of Passive-Investing Bashers: Financial Advisors' Daily Digest

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By SA Gil Weinreich :

Give Josh Brown credit for passionate argumentation (and take away even more for needless vulgarity), but a post of his yesterday condemns an oft-heard argument that the sheeple are headed off a cliff because they're all being herded into passive indexes, corralled there by robo-advisors.

Brown, tribune of the masses, thinks that active investing doesn't fare any better than passive investing and since it costs a lot more, why should investors be smothered in costs if they're going to lose money anyway? What's more, he thinks that it is a leap to assume that passive investing means 100% stock investing, arguing that advisors (presumably including his firm) and robos balance high-risk investments with low-risk ones, even in some instances to a fault. And finally, the investor-sheep presumed to be led to the slaughterhouse will actually benefit from market crashes to come since they are usually dollar-cost-averaging and will be able to accumulate more shares at a lower cost basis.

That's Brown's basic argument, though he adds a bit of a twist, by vaguely suggesting that investors have additional tools in the investment toolbox today that will in some unspecified manner help the sheeple avoid slaughter. He writes:

Portfolio solutions to reduce volatility or even make downside bets have bloomed like a thousand roses in today's era of FinTech and the Age of the ETF.Never before have investors and advisors been given so many tools to approximate what only the 2-and-20 set were once able to deliver. This is not to say that they're better or worse than any given hedge fund, it's just that they are highly available and in popular use.

You can read the whole post here . As his site does not allow for comments (perhaps for regulatory compliance reasons, as he is principal of a financial advisory firm), I encourage readers to debate Brown's challenge here, as it is a worthy topic. I'll start off with a few thoughts of my own.

First, Brown is certainly correct that investors should pay as little as possible for the privilege of investing. Secondly, it seems to me that many investors will indeed be slaughtered in future market crashes, whether cheaply or expensively, and many will not stick around for the low-cost-basis advantage that follows. To that end, investors in an advisory relationship could be better off as even run-of-the-mill advisors are trained to encourage investors to stick it out; human nature being what it is, vast numbers of others will flee markets, maybe forever.

Finally, while his basic argument in favor of indexing sounds plausible enough, I see no basis to assume that alternative investments will fare any better in the next meltdown than conventional investments. Many of these alternatives were developed as a response to, and thus after, the 2007-09 market crash. Back tests may offer encouragement, but a live test will reveal whether market correlations will rope in alternatives as well. All this is to say that at the end of the day, masses of investors will likely take a hard fall in the next crash. The fact that active investing is not the answer does not make passive investing correct by default. The preferred approach, as I've argued previously , is to diversify very widely and maintain high levels of reserves.

Following are few advisor-relevant links for today:

See also Q4 2016 Style Ratings For ETFs And Mutual Funds on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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