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Passive investing reached an important milestone in 2023. For the first time in history, passive funds surpassed active funds in net assets, with global assets reaching $13.3 trillion.
Although 2023 saw paltry flows after the 2022 bear market, this milestone capped a decades-long trend in how money flows from investors into the markets.
But Tom Sosnoff, co-founder of palatabletrade and co-founder and CEO of palatablelive, has made a career of believing that investors shouldn’t just sit back and relax in passive funds. He earned his trading chops over twenty years in the trading pits and another two on trading screens, and is known for his contrarian opinions.
In a recent appearance on Stocks in Translation, he claimed that passive investing, set it and forget it, is actually riskier than stock picking and actively managing your money.
“The problem with passive investing,” Sosnoff explained (see video above; listen below), “is that when you start passive investing when you’re young – you close your eyes, take a nap and wake up at 60 – and you I don’t know how markets work.”
Sosnoff believes that passive investing breeds complacency and potentially deprives the investor of an education in risk management, market mechanisms and decision-making. In contrast, active trading forces investors to think strategically, take calculated risks and adapt to market shifts. Losses are, so to speak, the tuition for an education.
The irony of this stance in favor of active trading is that it seems at odds with the near-constant drumbeat of pro-passive investment advice (like the one this author recently released this week).
But as William Lock, head of the global equities team at Morgan Stanley, wrote in July, “The decision to choose passive investing is still an active one,” adding for emphasis, “There are more than 3 million stock indices in the world – more than 50 times more indices than stocks!”
Sosnoff’s position is clear: by betting on yourself in the market, through active participation, you can gain knowledge about the real financial world – an education that can bring benefits later.
Sosnoff also sees the volatility that scares most investors as an opportunity, musing that it is “the only true mathematical equation in finance.” Price isn’t mean, but volatility is.’
For the co-founder of tastytrade, learning to manage volatility gives you the tools to take advantage of short-term inefficiencies, especially through strategies like selling options.
To be clear, novice investors can potentially take on unlimited risks by selling options. But there are also many ways that investors can learn to limit that risk, which again reduces Sosnoff’s arguments to education and hands-on experience in investing for risk management.
And here Sosnoff takes a unique view of risk, which is considered exaggerated in the financial world.
“Risk is something you can’t control,” he said, likening it to the unpredictability of another car hitting you. “The only thing you can control in the financial world is what you do.”
And what you can control, he said, is the size and diversification of positions.
By keeping your size small and spreading your investments across multiple assets, you essentially define and limit your risk, he says. “Anyone can do it,” he assured.
Sosnoff hammered home this point, saying, “The whole concept of active trading is that you learn how to make decisions. You learn how to take risks. You learn how to assess opportunities. You learn how to invest strategically when you If you don’t want to, you can always go back and invest passively.”
On the Yahoo Finance podcast Shares in translationYahoo Finance Editor Jared Blikre cuts through the market chaos, noisy numbers and hyperbole to bring you essential conversations and insights from across the investment landscape, giving you the critical context needed to make the right decisions for your portfolio. Find more episodes on our videohub or check your favorite streaming service.
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