When passive money is in danger in choppy markets, it’s time to get an active fund manager

The passive index fund came from the idea that it is easier to buy the market index, and cut out the stock picker. But passive funds will lose money in volatile markets, which active investors can take better advantage of

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A screen displays a chart of the Dow Jones Industrial Average during trading on the floor of the New York Stock Exchange on March 20. Passive index funds will follow the market, which is becoming increasingly volatile. Photo: Reuters

Published: 1:00pm, 21 Mar 2019Updated: 10:22pm, 21 Mar 2019

Balancing risk and return never fails – over the long run. But as economist John Maynard Keynes said, “In the long run, we are all dead”, and so human behavioural instincts turn to the short term. We want it all and we want it now, preferably cheap.

Balancing the short and long, or risk and return, is the essence of a professional investor. But, as my old friend Alan Murray said: “There is no such thing as a professional investor, the best of us are merely gifted amateurs.”

It was the gifted amateurs at the United States’ RAND Corporation who set the scene for three generations of investors. RAND, which began as a research-and-development project in 1945 and was incorporated in 1948, has since become a non-profit, non-partisan global policy think tank that tackles security, scientific and societal issues.

I won’t bore you with more history but the best and brightest young researchers, like Harry Markowitz (now 91 and writing a three-volume book), turned their minds to making some sense out of Wall Street, that gambling den still finding its feet after the Great Depression and war.

Markowitz pioneered modern portfolio theory (now not so modern), which involves minimising risk and maximising return. Milton Friedman, reviewing Markowitz’s University of Chicago PhD thesis on the theory, refused to accept it as an economics dissertation. In 1990, Markowitz won the Nobel Prize in economics.

Harry Markowitz was awarded the Nobel Prize in economics in 1990 for having developed a theory of portfolio choice. Photo: SCMP Pictures