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Old 12-30-2016, 08:55 AM   #9
Franchise Player
Join Date: Dec 2006
Location: Calgary, Alberta

Well its definitely active because its asset allocation. I love Buffett, and I expect with him beating the hedge funds in the bet he made about a decade ago now you're going to hear a lot about this topic from him this year. So here we go, one topic at a time:

A) Just buying ETFs isn't passive. I don't know what the count would be, but there are thousands of ETFs for all different types of investing. Some are specifically for hedging and some are for very specific sectors. I have seen evidence of very short holding periods for some ETF holders as well (3.5 days at times), which can't be considered passive. There are a lot of decisions to be made to buy these, and I'll address some of those below.

B)Adjusting your allocation and reducing equities is absolutely active as opposed to passive. Changing your allocation from say the US to Europe isn't passive, and it doesn't become passive just because you do that with ETFs. You're making an active call on the markets.

C) Beating the market is a whole other topic. Firstly, is beating the market actually meaningful? Which market? If you're in Canada and the point is to beat the TSX does that mean that you can hold the S&P or Europe or Emerging Markets and do that job? I don't think so. And why do we care about the beating the S&P 500 or Dow Jones in the first place? Because its on the news or BNN all the time? I don't think that matters at all. Basically my opinion is that they became benchmarks basically by accident. They're on the news and people see them, so we compare to them. Matching them less fees or beating them doesn't mean you have enough to retire, or can generate a proper retirement income though; it's just a figure we see regularly.

And of course, it has to be said that using ETFs you will never beat the market. You will get a return that matches the index you're tracking less the transaction costs and MER. Those fees vary and some are not as cheap as you might hope. It's true that they are largely cheaper than mutual funds, but more expensive than stocks. Proponents love to compare the fees to mutual funds but seem to fail to mention that while the MER on mutual funds is higher, there is none at all for stocks.

D) Then I feel the need to talk about the oft-cited Warren Buffett advice to buy the index. You can do that for sure, and frankly I'm a little hypocritical as I have a lot of my clients in ETFs (although I would define it as active as opposed to passive). But of course it has to be noted that Buffett doesn't do that. Why not? It's cheaper to hold his stock than an ETF and he beats the market consistently. It's arrogant to suggest that he is the only person who can do it; and just not true in my opinion. At any rate, why not just buy Berkshire Hathaway?

E) and this might be the most important. Which index? So Buffett says that he would just buy the S&P 500. Great. Does that apply for a Canadian? I would suggest that the currency might temper your enthusiasm at this point because a rise in the CAD/USD over the coming years will eat into your return. So are you going to hedge that? At some point then you might want to remove that hedge...another active call. And of course you're absolutely going to want to allocate between Canada/US/Europe/EM/Rest of the World and then with bonds in the mix as well, presumably reducing the risk of this portfolio as you age. That is active call after active call now. And when you finally get there, in your retirement, you are going to want to generate income from this. That's not a concern for Buffett because he still works and gets paid to this day. Not everyone plans on working until their last day though, so income, becomes a concern.

I better mention that I am a huge follower of Buffett and have probably read around 20 books on him, his investing style and I definitely understand his methods. I'm a long-term Berkshire shareholder, personally, and I've been to the AGM more than once. I've heard the "buy the cheap index" advice in person. But the truth is that approach isn't for everyone.
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