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Disclaimer
Investing In Emerging Markets
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When it comes to the active versus passive investing debate, to me, its a no-brainer: Im a passive guy.
My entire portfolio consists of a couple of broad-market stock index funds and a bond fund. I dont own any individual stocks and zero funds that try to beat the market. I stay invested in good times and bad and I ignore my portfolio as much as possible, except for annual rebalancing. (In practice, this means I look at it once a week. Thanks a lot, Mint.)
I invest this way not (just) because Im lazy, but because I believe the evidence is overwhelming that a passive approach will outperform the vast majority of active investing strategies over time. Yes, over any given period, some active funds will outperform by a little and a select few will outperform by a lot - theyll sail through a bear market smelling like honey.
Unfortunately, its impossible to know ahead of time which will be the winning funds and you might end up selecting one of the big losers. Oh, and index funds cost less. That means more money for me and less for a money manager .
As Rick Ferri puts it in his book The Power of Passive Investing, theres only a low probability that any fund will achieve superior returns. While its possible, its not probable.
Or take it from author Bill Bernstein: The debate between active and passive management is like the debate between astrology and astronomy, he said in a recent interview.
As you can tell, Im convinced of the superiority of index funds and passive investing to the point of smugness, so I thought it would be good for me to talk with someone who fundamentally disagrees. Jerry Webman is the chief economist at OppenheimerFunds and author of the new investing guide MoneyShift: How to Prosper from What You Cant Control. He dedicates an entire chapter of his new book to building an intelligent argument against my style of investing, and the book is witty and engaging.
Webman and I didnt have time to hash out the entire classic active/passive investing debate, so I wanted to focus on one of his favorite topics: emerging markets. These markets now account for about one-quarter of the stock market wealth outside the U.S., and we both agree that its important for a portfolio to own stocks from emerging economies like Brazil, India, and China. We disagree about the best way to do it, though.
An Emerging Discussion
MoneyShift argues that most investors, including index fund investors, are missing out on buying opportunities in emerging markets. Emerging markets is one of the places where its easiest to make the case for bottom-up active management, Webman told me. You really do have many companies that are not carefully followed, maybe not well-understood, and a careful manager takes the time to figure out what the real market for the company is, and how they fit with the regulatory environment in which they have to work, which might not be fully evolved. It would be foolish to surrender the emerging markets portion of your portfolio to a dumb index fund, Webman argued. I want somebody whos taking a really careful look at it, he said. Theres a lot more value to be added by someone wholl go and do the research in less-understood and less-invested markets.
To put it another way, its hard to learn anything new about an S
