In Search Of: A New Name For "Passive"

One of the many reasons "passive" investing gets dissed is that its name--"passive"--is both misleading and deflating.  Who wants to be "passive"?  The folks who do well in life are active, the ones who have gumption, the ones who get up off the couch and make things happen.  "Passive" investing, moreover, isn't passive--it's active.  Smart passive investors actively determine which types of stocks they want to invest in, actively screen the market to find such stocks, and actively manage their portfolios to make sure they contain only such stocks (and in the proper proportion). 

So smart passive investors, the ones who wouldn't mind earning some respect in addition to superior returns, are forever searching for a new term to describe what they do.  Alas, to date, none has been found.

"Indexing" doesn't work, because "indexing" suggests that the passive investor is simply trying to match the performance of the S&P 500, Russell 2000, or other index.  And now that such strategies are popular, the style suffers from herding, index-reconstitution, and other problems (even thought it still outperforms most active strategies).

"Rules-based investing" doesn't work because...well, because it's boring and vague.

"Factor-based investing" doesn't work because it's mystifying.

"Dimensional investing" doesn't work because...ditto.

"Quantitative" doesn't work because it has already been coopted by "quants."

The latest suggestion, "Equilibrium-based investing", put forth by DFA's Weston Wellington in a recent article, doesn't work because it doesn't mean anything that couldn't just as easily apply to the "active" world.  (Although it is arguably better than "passive").

So the search continues.  One thing is certain, however.  If passive investing continues to be called "passive," those who advocate the strategy will continue to operate at a major marketing disadvantage to their "active" competitors.  In fact, given the inherent connotations of the words "active" and "passive," it is almost certain that the nomenclature was devised by a traditional stockpicker.

Comments

[Dylan Ross]

I tend to define passive investors as those following a set of rules developed or maintained by someone else, and the less action required to adhere to those rules, the more passive the strategy. If every investor uses some variation of a rules based strategy, they are all still playing the same less-than-zero-sum game. How do you determine which methodology is superior?

Maybe we shouldn’t be defining active and passive like we do black and white, but rather as shades of gray. An argument can be made that enhanced indexing, fundamental indexing, and some of the rules-based strategies fall somewhere in between, in the gray area.

I’m not even sure that the label is all that responsible for its level of popularity, especially since the term, “lazy portfolios,” (used to describe static portfolios of index funds) appears to be gaining in popularity.

It does appear that as you travel across the spectrum from the more active strategies to the more passive ones, costs decrease, less investor effort is required, and you are better compensated for your risk, so if you must replace, “passive,” how about using the word, “efficient?”

[Lorne Abramson]

Hi Henry -- I've been admiring your work since it was initially published on slate.com, and I have given copies of your new book to a couple of clients. FYI, for what its worth, I believe Westin Wellington at DFA is ultimately incorporating Ken French's term "equilibrium investing." I was at a DFA conference in Santa Monica last week, and Prof. French specifically referenced this notion (as he did in a CFA Magazine article in Sept-Oct. 2005).

[chris]

How about "complete investing", or in the spirit of Dutch soccer, "total investing?" Hmm ... I really like total investing. Why leave companies out of your portfolio? Invest in all of them! Really, between Vanguard's Total Stock Market and their new FTSE ex-US you have pretty much every company in the world. Total Investing!

[Dan Goldie]

Rex Sinquefield used the term "asset class investing" starting in the early 1990s. John Bowen and I used this term to describe our method of using passive DFA funds in multi-asset portfolios in our book, "The Prudent Investor's Guide to Beating Wall Street at Its Own Game" in 1998.

I like "asset class investing" because I think it is clear, concise and properly descriptive.

[Dan Goldie]

Rex Sinquefield used the term "asset class investing" starting in the early 1990s. John Bowen and I used this term to describe our method of using passive DFA funds in multi-asset portfolios in our book, "The Prudent Investor's Guide to Beating Wall Street at Its Own Game" in 1998.

I like "asset class investing" because I think it is clear, concise and properly descriptive.

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I have been admiring your work since it was initially published on slate.com, and I have given copies of your new book to a couple of clients. FYI, for what its worth, I believe West in Wellington at D FA is ultimately incorporating Ken French's term "equilibrium investing." I was at a D FA conference in Santa Monica last week, and Prof. French specifically referenced this notion (as he did in a C FA Magazine article in Sept-Oct.

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