If we consider any argument involving money managment, personal finance, investing, insurance, etc., there is something common among the two or more opposing ideas/sides. Each side thinks their choice is the best. Each side is pretty smug about their decisions. Unfortunately, this is rather immature, and we need to do better.
Take, for example, the active vs passive investing debate. Many in the active investing gang refuse to see hard evidence and assume their choices will beat the market. For many of them, investing starts and ends with seeking higher returns. Their arguments are often laced with biases – hindsight, survivorship, hot hand, etc.
The hard evidence:
- Only 3 out of 28 mid cap MFs consistently beat Nifty Midcap 150!
- Why are you comparing Small Cap Mutual Funds with a Mid Cap Index?!
- Why we badly need an aggressive hybrid index fund!
- Active Large Cap Mutual Funds vs Nifty 100 performance analysis.
Despite this evidence, many believe they will be able to pick the future market beaters with nothing more than past performance to rely on.
For many in the passive gang, investing seems to start and end with reducing fund management fees. Anyone investing in active funds is looked down upon.
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The simple truth is active or passive investing is hardly a primary priority. Our investment strategy matters – why we are investing, the target corpus, the asset allocation, the rebalancing rules, the de-risking rules, and the portfolio review results matter. If these are in place, active or passive investing is irrelevant.
The root problem with this argument (or, for that matter, any argument) is that each side believes they are right and their choice is the best. We refuse to acknowledge that there are multiple ways to go from A to B. Some are more efficient than others, and some whose efficacy can only be judged in hindsight.
What matters the most is that we start the journey. And once we do, we must not claim our choice is the best and learn to respect other choices.
There is another facet to this discussion. Many investors assume they can find the best products, asset mix, or combination that will result in lower risk, lower taxes, and higher returns. Such a search is equally unproductive as the above-discussed argument.
Every investing choice (like most other choices in life) is a leap of faith. We choose something based on present evidence. We review periodically and change if things don’t work out – no harm, no foul. As with life, we live and learn.
There is no magic path that we know beforehand will always work. The only comfort is we will know where and how to correct the course if we have a goal and a target corpus. So, we must not be smug about our investment choices and stop assuming they are the best.
What matters more is if they are suited to our needs or not. Sometimes, we would know this early and sometimes on the way.
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