2023 Is Finally The Year For Active Management

This gets said every year, this year you want to employ active management. This year is no more or no less the year for active or passive management than any other year. Realistically, most passive investment strategies are actually active management of passive tools like index funds. Of course, there's an argument that index funds aren't really passive because of how the indexes are constructed.

The catalyst for this post was a Tweet from Adam Butler who talked about a backdrop in the 2010's the promoted speculation and what he called Minskyian Moral Hazard (a nod to Hyman Minsky). His Tweet was in response to a commentary by Mohamed El-Erian in the Financial Times titled why passive investing makes less sense in the current environment. 

When I read this sort of argument, I don't think in terms of changing strategies in a sweeping fashion from active to passive or passive to active or whatever. Many years ago I noted one reason for blogging is to chronicle the evolution of my investment process for anyone who cared to follow along. As hinted above, I don't think anyone is truly passive. How can they be in face of rebalancing at some frequency or in the face of life changes? My investment process/strategy is most certainly active, not heavy trading but active nonetheless. 

Portfolios are composed of individual issues, narrower ETFs and a couple of mutual funds that offer a strategy where I think that wrapper is better than an ETF. The tech sector ETF I use is an index fund but is used actively. If I am counting correctly, eight of the individual stocks I own in client accounts have been held for more than 15 years with a few more held for at least ten years. If you buy a stock and hold it for 30 years, how active are you really? 

The ongoing point is to ditch these labels and forget about this conversation that never goes away. It promotes short termism. Some allocation to equities is always going to be part of the portfolio. Neither active nor index fund will always outperform so switching to active this year in the context of El-Erian's commentary does what exactly? You'll outperform this year, unless of course you don't either because El-Erian turns out to be wrong or you choose the wrong actively managed fund or any other number of reasons. 

I would say to allow your investment process to evolve. The biggest source of evolution into portfolios that I manage has been to make use of strategies that used to not be available to retail sized accounts to manage portfolio volatility. I am more aware of the word ergodicity as pertains to equities but I'd been a very long term holder of certain names before I knew the word. The intersection of these ideas that has maybe changed how I manage portfolios is that I am less likely to sell a stock or fund simply to get defensive from the top down as opposed to adding something that should go up when stocks go down.

The idea of switching from index funds to active seems to drift into trying to guess which factor will be the best next year. This often results in chasing last year's winners as we've talked about several times recently. 

Focus on a long term process that you allow to evolve slowly is my best advice.