Passive Investing

Passive Investing lets you have a Life

June 23, 2008


I thought I’d share one of the less appreciated benefits of passive investing after reading Million Dollar Journey’s post on working hard for our money instead of doing the things we value more. Like most Canadians, we work extremely hard – between us we have two day jobs, write a blog, attend graduate school, raise two young children, all the while attending to the endless chores of a normal life – and find that time is a very precious commodity indeed. If finances aren’t your hobby, passive investing lets you get on with your life, whether it is gardening, photography, traveling, spending time with the family or whatever.

Regular readers know that I used to be an active investor. Active investing is definitely fun and perhaps even profitable but it does take a lot of work and research. For example, let’s say that you currently don’t have any exposure to health care in your portfolio and want to add some. Should you buy Pfizer (PFE) or Merck (MRK)? Or maybe, you should invest in a biotechnology stock like Amgen (AMGN) or Genentech (DNA) instead. How about the small biotech companies in the discovery stage? Perhaps, you think that with many prominent drugs coming off patent protection, a generic drug company like Teva (TEVA) or our own Biovail (BVF, for the masochist within us) would be a better holding.

Even after doing your research and picking one, you’ll have to keep track of your holdings. How is company doing with sales and earnings compared to its peers? Has the competitive position changed? Do you still trust the management? On and on it goes and that’s just for one stock position in your portfolio. Let’s say an investor needs 10 to 20 stocks for a fully diversified stock portfolio. Multiply the time needed by the number of stock positions and you’re looking at having a second job which may or may not turn out to be profitable.

As a mostly passive investor now, I find that there is very little demand on my time. Once I decided on an asset allocation and picked a handful of funds or ETFs to hold, the portfolio is more or less on auto pilot. The only thing I then do is rebalance occasionally when adding new savings to the portfolio and trying to be a bit more greedy when our major newspapers report on panic in the stock market in the front pages. The benign neglect benefits the portfolio as well as less activity means fewer opportunities to do stupid things.