Timing can work against me in writing our monthly "Fun Facts…". I wrote the February Fun Facts on January 31st, wherein I used the old Boy Scout motto "Be Prepared" for stock market volatility at any time.
When it comes to investing, the "active" versus "passive" management battle continues. What is it all about?
"Active" management describes investment advisors who think they can buy individual stocks and bonds that will perform better than the stock or bond market as a whole. For example, they buy Coca-Cola but not Pepsi, Apple but not IBM, or Macy's but not Target.
"Passive" management describes investment advisors who buy all of the securities in a market index in the proportion owned by the index. For example, they buy all 500 stocks in the Standard & Poor's 500 Index in the proportion that each stock is weighted in the index. The top five holdings would be Apple, Exxon Mobil, General Electric, Chevron and IBM. (Procter & Gamble is the eighth-largest holding, for those of you with Cincinnati roots.)
Investors Vote with Their Feet
In 2012, according to The Wall Street Journal, investors pulled about $120 billion dollars from actively managed funds, the largest yearly outflow since 2008, while pouring about $155 billion in to passively managed investments, the largest inflow since 2008.
Why Passive Management?
There are two key advantages to passive management.
"The advantages of passive investment management are hard to beat." [Tweet this]
- Cost. Passive funds have significantly lower management fees and expenses. According to The Vanguard Group, one of the largest passive fund companies, its passively managed funds are 82% less expensive than the industry average. This is particularly important for bond funds in a low-interest-rate environment.
- Diversification. Passive funds own more securities so there is less specific security risk. More important is the performance of stocks an actively managed fund doesn't own. If an actively managed fund doesn't own just a small handful of the top-performing stocks, it will under-perform.
The battle between active and passive management has raged for years and will continue to do so. The advantages of passive management, however, are hard to beat.
About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.
The most common question we have heard from our clients lately is, "Should we buy gold?" There is a long list of reasons why the answer is "No!"
- Gold investors made absolutely no money for 25 years from 1980 to 2005, according to Ibbotson Associates.
- The price of gold actually declined about 50% from 1980 to 2000. Even the most disciplined of investors would have given up during that time, since traditional stocks and bonds were performing well above average during that same period.
- Gold, like all commodities, does not pay any interest or dividends.
- Only about 11% of gold has an industrial use. It is not sold and consumed like oil or natural gas.
- The actual replacement cost of gold is about half of the current value. According to Dan Denbow, co-manager of the USAA Precious Metals and Minerals Fund, it costs about $600 to produce an ounce of gold, but that rises to about $1,000 per ounce when all of the costs of mining are factored in.
- As of this writing, gold recently spiked above $1,900 an ounce.
- Gold was up about 16% for the month through August 22, 2011, therefore heading for its best monthly performance since September 1999.
- Gold has increased in value in value for 11 years, the longest winning streak since at least 1920.
- Exchange Traded Funds (ETFs) have made it very easy for individual investors to buy gold. But if selling is triggered, heaven-forbid panic selling, then the price swing could be swift and sharp.
In our opinion, buying gold today is like buying tech stocks in the late 1990s. It may continue to go higher in the short-term, but the long-term trend is screaming "buy high," to be followed, of course, by "sell low!" Let's not do that!
About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.