It had been a few weeks since Dylan last appeared on tastytrade. He made up for that absence by presenting two more reasons to be a tastytrader. This week, the discussion was focused on two sides of the same coin: passivity is destructive to wealth; followed by the point that active investing works.
Mention the word “passive” to Tom and his head sort of tilts, glasses come off and his facial expression becomes much less welcoming. To paraphrase him, passivity breeds ignorance. There is no learning taken away from being passive. Relying on doing nothing is tantamount to hope and hope is rarely a good strategy. It does not work in life and it fails miserably at investing.
Take bonds for example. An investor who passively invested in a bond fund was enjoying an amazing year, right up until about a month ago. When those same investors receive their most recent statements, they will see a substantial drop in portfolio values with bonds now being down on the year.
Liz pointed out how we are taught from a young age to trust an advisor with our money (emphasis on “our money”). However, as both Ryan and Frank asked, what makes us think an advisor knows more than we do? Furthermore, how can anyone learn if they are passive?
Frank worked for Merrill Lynch where he participated in a project researching whether it is better to buy the S&P 500 (SPY) outright or sell puts. Really? That is what the great investment institutions of the world spend (your) money researching? Any tastytrader, after just a few minutes viewing the broadcast, knows selling puts lowers cost basis and provides an increased probability of success. Ask that your 2% in management fees be refunded.
For tastytrade, “passive” is synonymous with “prayer.” It means blind reliance on someone else. It teaches nothing and perpetuates the myth that somehow, we’re incapable of managing our own destiny.
If passivity is prayer, then active is engagement.
There is a misconception surrounding the word “active” when it comes to investing. Somewhere along the way, “active” became synonymous with “direction.” An active investor picks market direction. Not so much.
An active trader is an engaged trader. Active trading is educated trading. The only way to change the connotation around “active,” as Beef and Jenny say, is through education.
At tastytrade, active investing is a combination of engagement and utilization of all available investing tools to reduce cost basis and lower risk. Notice the word “direction” is nowhere to be found in that last sentence.
The argument for taking an active role in investment decisions is not just theoretical. The argument can be quantified.
When the choices for how to invest are clearly explained, the argument for active participation wins. The challenge rests in education. Understanding active does not mean directional. Understanding investment choices, their respective risks, rewards and probabilities. Understanding, as Tom made very clear, the financial services industry has a vested interest, to the tune of profit margins ranging between forty-five and fifty-five percent, to keep investors uneducated.
Jenny shared a story about when she left the trading floor. She did not know about self-directed investing, so she put all her money in a mutual fund. Fast forward eight years when Jenny and tastytrade locked eyes across a crowded room. Jenny was a mom, she evolved, she grew but the money in that fund, eight years later, was the same amount she originally invested.
Mike majored in Marketing, not Finance. This is his first year investing and his performance has exceeded anything he would have made passively. Mike made a choice to take an active role in his finances. It is a choice we all have. We simply need to understand the difference between passive and active.
Dylan equates wealth to potential. Wealth does not have to be monetary, it can also mean things such as intellectual capacity. He argues, understanding potential is what allows us to capitalize on it but that cannot happen if we are passive. At the same time, being an active trader has nothing to do with picking direction. Active investors are engaged investors, capitalizing on resources to reduce cost basis, manage risk and increase returns.
More and more it is becoming too obvious to ignore we live in a passive world. We accept things we see on television or read on social media. We no longer question or take time to learn for ourselves if what we are being told is accurate. We were told to avoid fat, but that sugar was less dangerous. Enter: obesity and diabetes. We were told that home values can only appreciate. (Hello, 2008!)
Politicians make statements unsupported by any evidence, yet those statements are accepted as fact. To be active is to question and learn. It involves making mistakes then improving. In the end, to be active is to push toward growth. Passivity destroys wealth and allows ignorance to be exploited. It is true in every facet of life. The tastytrade approach is not simply limited to investing. It is a revolution in how to intelligently approach decision making.
Josh Fabian has been trading futures and derivatives for more than 25 years.
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