Passive is not Lazy Investing

As I have said previously I use mostly a passive investment strategy for most of my savings vehicles (RESP, RRSP, TFSA, RDSP and Spousal RRSP). I was once an Active Investor. A lot of mistakes were made, thus I decided maybe I wasn’t really cut out to invest in individual stocks. I do hold a few stocks in a few accounts, but they are mostly Dividend Paying stocks, which I simply haven’t had the heart to sell off (they are in  Dividend ReInvestment Plans). Passive investing is not lazy investing (keep that in mind).

I have spoken with a few folks about Passive Investing, and it seems that Passive seems to imply “Fire and Forget” or “Just Leave It and Walk Away” as a methodology. Some folks may make that work. As with any investing, however, there is a need to stay up to date with your portfolio. Understanding what kind of performance you receive from the investment is key. Reacting to market changes and re-balancing your chosen investments comes into play as well.

This is your money and you should never give your money to any investing concept (or person) and then just assume it will all work out nicely (yes, I am a paranoid former Nortel investor, I plead guilty on that one).

A good case in point is  Vanguard’s Total Stock Market Index ETF that I own as part of a couple of my accounts, because it boasts being effectively the “… broad U.S. stock market …” in one ETF. It holds many different stocks, but is risky in the sense that it is all in stocks. I decided this might be a good way to have a U.S. Investments portion in my RRSPs. I am neither endorsing, nor am I flagging this fund. I am using the ETF as an example of why you need to read the annual reports about your investments.

By reading the Annual Report, I learned about two terms I was unaware of:

• R-Squared
• Beta

These are both explained in the report’s glossary as ways to measure how closely a fund tracks with a given index. This alone was useful (I like to learn at least 3 things from anything I read, so this was a great start).

The next more important point brought up was that the Fund was going to track a new Benchmark Index. This index will be supplied by CRSP at the University of Chicago Booth School of Business. Wait, what the…. Yes, so if you have bought a fund because it tracks one Index, they can change their minds (effectively). There is risk, but any change always worries me.  My guess is it will not change things too much, because most folks who hold this ETF are like me, looking for a “broad spectrum of companies” fund, and if it goes too much away from where they are now, investors will simply sell it and look for something that is closer to what they want. Given the following quote from the above article, I feel OK continuing to hold the fund:

Among the funds that CRSP will now provide indexes for is the $23.5 billion Vanguard Total Stock Market ETF (NYSEArca: VTI)—an index-investing purist’s security that canvasses just about the entire U.S. stock market, and will cover a bit more of it once the transition to the CRSP US Total Market Index takes place.

Not Lazy Investing

These three important  things (I learned) alone support my contention that Passive Investing does not mean “Fire and Forget”, you must remain diligent keeping up with your investments and what is happening with them (and at least re-balance once a year too).  If you think you have bought a “balanced” fund, how is it balanced? You need to know these things. You need to at least read the Annual Reports. Simply throwing them in the garbage is a waste of paper.

Any other examples out there of catching changes in a Fund’s Annual report?