Ask Colin

My question is about passive versus active investing. You are now investing in LICs and ETFs as well as individual stocks; is this because you believe that passive investing will result in the same or better returns than active investing or have you changed your portfolio makeup for personal reasons?

This is a very good question because (a) It is a change from my usual investment plan (b) I have not fully explained it. In fact it is a work in progress, so to speak, and I may modify it going forward.

The index fund industry make a quite cogent case for broad-based index funds, which should not do worse than the market index they try to track. They are highly unlikely to better it either. I decided to take a holding  in the ETF (ASX calls the ETPs) for each of the two main suppliers, which also track two different indices (not that I expect them to diverge significantly). This will give me some practical experience with them going forward – both performance of the fund and their administration. I  plan to hold them through the cycle.

The LICs have for some time been my retirement strategy – see the paper on the members section of the website at Building Wealth Resources / Charts and Data. As you know I plan to retire from the website at the end of the year. I also want to cut back my time required by investing, so I can do other things that I do not have time for now. I plan to hold them through the cycle.

That accounts for half of the portfolio. The other half is in leading stocks which are in non-cyclical businesses/industries. My intention is to hold them through a bear market, but time will tell whether I can change the investing habit of 50 years and sit in them though the cycle. I don’t expect they will do better than the market in a bear market, but they should not do much worse and may recover faster than smaller and weaker stocks. If we get to the start of a bear market and I lose my nerve, I will switch into index funds or/and increase the holdings in the LICs.

One thing driving my strategy is that I do not trust the major banks or the government in a serious bear market. I do not want to be “bailed-into” bank stocks because the banks are in serious trouble… or worse…

Markets always return to new all-time highs on the accumulation index (includes dividends), so the ETFs and the LICs should recover over time. An alternative is to sell when the bear market starts and spread the cash over a number of banks and hope the government guarantee is honoured in time to catch the next bull market. In this respect, remember the Pyramid Building Society. The Victorian government made the investors whole from a petrol tax, but it took many years. The danger is that my capital is tied up until well into the next bull market and I do not get the recovery, and maybe not any interest in that period either – only the deposited amount is guaranteed.

I hope this clarifies what I am doing. Thank you for asking the question.