Anyone have any advice on passive investing– there is no timing the market, so one therefore invests with an eye to neither highs nor lows of a particular day or time or season?

Ralph Vince writes: 

Correct, but there are now two "flavors" to such, as you will, as an advent of "active" indexes. Typically, one would mimic, say, the S&P 500, and the returns would be those of the S&P 500 (there is a problem with reinvestment of returns here often, and of additions and withdrawals, but in theory, you would track the index).

"Active" indexes typically seek the same underlying components, but the weightings into the components tend to be dynamic, so the returns tend to be those of the underlying index with an upward bias.

Rocky Humbert writes: 

Ralph raises a brilliant point. Over the last 20 years, the Russell 2000 (small stock) index and the S&P500 (large cap) stock index have both returned about 8% per year.But from 1993 to 1999, the S&P returned 24% per year while the Russell returned 12% per year. A 200% outperformance for the big cap index…Next, from 2000 to 2011, the Russell returned about 7% per year while the S&P has returned 2% per year. A 350% outperformance for the small cap index…Today, the Russell is trading at 35x trailing p/e … while the S&P is trading at a 14.6x trailing p/e. In order to justify this record valuation difference, small caps must grow their earnings twice as fast as big cap companies. While small companies often grow faster than big companies (due to the math of compounding), arguably Mr. Market's pendulum has swung too far — and it's improbable that the Russell 2000 will outpeform the S&P500 over the next 5-10 years FROM THE CURRENT RELATIVE VALUATIONS.

Note: Dr. Zussman, I (and many others) have studied this phenomenon, and we've not found any consistent explanation for these swings other than investor preference…. and these cycles/trends last years and go further than "sensible" people expect. However, if I were starting a passive investment strategy today, I certainly wouldn't pick the IWM (Russell 2000) as my investment vehicle with a 5-10 year time horizon.


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