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Passive investing hit a major milestone in 2023. For the first time ever, passive funds surpassed active funds in net assets with global assets hitting $13.3 trillion.
Though 2023 saw paltry flows after the 2022 bear market, the milestone capped a decades-long trend in how money flows from investors into the markets.
But Tom Sosnoff, co-founder of tastytrade and co-founder and CEO of tastylive, has made a career believing investors shouldn’t just sit back and relax in passive funds. He earned his trading chops over two decades in the trading pits and another two on trading screens and is known for his contrarian opinions.
In a recent appearance on Stocks in Translation, he asserted that set-it-and-forget-it passive investing is actually riskier than stock-picking and actively managing your money.
“The problem with passive investing,” Sosnoff explained (see video above; listen below), “is that when you start passive investing when you're young — you close your eyes, take a nap, and wake up at 60 — and you don’t know how markets work.”
Sosnoff believes passive investing breeds complacency and that it potentially deprives the investor of an education in risk management, market mechanics, and decision making. In contrast, active trading forces investors to think strategically, take calculated risks, and adapt to market shifts. Losses are, so to speak, tuition for an education.
The irony of this position in favor of active trading is that it's seemingly at odds with the near-constant drumbeat of pro-passive investing advice (such as that dispensed most recently by this author this week).
However, as William Lock, head of the international equity team at Morgan Stanley wrote in July, "The decision to opt for passive investing is still an active decision," adding for emphasis, "There are over 3 million stock indices in the world — over 50 times more indices than stocks!"
Sosnoff’s stance is clear: Betting on yourself in the market, through active participation, provides an education in real-world finance — one that might provide benefits down the road.
Sosnoff also sees the volatility that scares most investors as an opportunity, musing that it's "the only true math equation in finance. Price is not mean-reverting, but volatility is."
For the tastytrade co-founder, learning to navigate volatility equips you with the tools to take advantage of short-term inefficiencies, especially through strategies like selling options.
To be clear, beginning investors can face potentially unlimited risk by selling options. But there are also many ways investors can learn to limit that risk, bringing Sosnoff's arguments once again back to education and real-world experience in investing with an eye toward risk management.
And here, Sosnoff takes a unique view of risk that sees it as overblown in finance.
“Risk is something you can’t control,” he said, likening it to the unpredictability of another car hitting you. "The only thing you can control in finance is actually what you do."
And what you can control, he said, is position size and diversification.
Keeping your size small and spreading investments across multiple assets, he argues, essentially defines and limits your risk. "Anybody can do it," he assured.
Sosnoff hammered home the point, saying, "The whole concept of active trading is you learn how to make decisions. You learn how to take risk. You learn how to assess probabilities. You learn how to invest strategically if you want to. And then if you don't want to, you can always go back and passively invest."
On Yahoo Finance's podcast Stocks in Translation, Yahoo Finance editor Jared Blikre cuts through the market mayhem, noisy numbers, and hyperbole to bring you essential conversations and insights from across the investing landscape, providing you with the critical context needed to make the right decisions for your portfolio. Find more episodes on our video hub or watch on your preferred streaming service.
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