The Truth About “Set It and Forget It” Investing

Steve McDonald By Steve McDonald, Bond Strategist, The Oxford Club

Slap In The Face Award

Transcript:

This week’s “Slap in the Face” Award goes out to all the folks – and there have been a lot of them, including Warren Buffett and his heirs – who have bought into the passive investing “set it and forget it” magic.

And it has been a real buying frenzy. But I’m afraid there’s no set or forget magic happening there.

Ten years ago, 84% of funds and ETFs were actively managed. Today, that number sits at 66%. That marketing machine for passive investing has been going 24/7.

For several years, I’ve been watching this stampede. And in the back of my mind (with 33 years in the markets), I’ve been thinking this is too much, too good, too fast. Something has to be amiss here. Nothing works this well, this magically.

Well, the numbers are coming out on this new “can’t lose” idea, and it isn’t magic anymore.

It seems the same problems the little guys had with actively managed funds are haunting them in passive funds and ETFs, too…


Like chasing performance; Looks like all the small investor is doing is buying into passive funds and ETFs after big run-ups – which essentially amounts to buying high and selling low. Oh, and dumping when the markets go against them.

And what is so passive about these funds when they have to sell a stock at the bottom – when a company is dropped from an index – and buy the new replacement at highs? This is what’s happening.

And it seems most investors are trading them just like stocks… with the same awful market timing. The “buy high, sell low” mentality has never worked.

Do I think passive funds are worthless? No, they are cheaper. That’s a positive. If you can avoid all the same old losing behaviors, which we obviously can’t, they have their place. And you will make money if you don’t chase performance and don’t buy after a run-up like we just saw. You wait for a big sell-off, and you can leave your stocks alone.

But we can’t!

As has always been the case, the little guy cannot get out of his own way. We could screw up a one-car funeral.

This is getting worse, not better. And there are proven ways to stop the bleeding, but the only thing anyone seems willing to buy is magic.

Good investing,

Steve