If you’re wondering about active versus passive investing performance, you’ve come to the right place. Overall, it’s better to be a passive investor because it is very hard to outperform various stock market indices.

One of the reasons why I left institutional equities in 2012 was because I felt it was a dying business. Trading commissions were getting squeezed due to algorithmic trading and other technological advancements. Further, assets under management (AUM) for active money managers was also declining due to poor performance.

Working harder and getting paid less was already demoralizing. Watching my clients I cared about work harder and underperform their respective indices made me feel like my job was pointless. When you feel like your job is pointless, it’s time to do something new.

Since the time I left my day job, the business has only gotten worse for actively managed funds. Yes, it is true that passive money managers gained a tremendous amount of assets during this time period.

But there is no excitement speaking to an index fund manager or analyst because they don’t do any analysis. All they do is follow the moves of their benchmark indices. For example, if the S&P 500 removes one name from its index, so does the index fund manager.

As of 2020, the market share of passively managed equity funds has risen to 45 percent according to Bank Of America. For passively managed bond funds, the market share is roughly 25 percent. The market share gains will likely continue.

Let’s look at some active versus passive investing performance in equities and fixed income over the past 10 years. You’ll be shocked at the results.

On September 15, 2008, Lehman Brothers went bust. I remember this day clearly because I made a $200 side bet with my friend over the weekend that the US government would bail them out. To my surprise, the US government didn’t rescue Lehman, and the stock cratered that Monday and never recovered. This is my most poignant memory of the financial crisis.

Despite all the economic devastation, I wouldn’t mind rewinding time and going back to 2008. I’d rather be 31 than 42, simply because I love life and want to live as many years as possible.

As we potentially head into another recession due to the coronavirus locking up economic activity and the collapse of oil prices causing tremendous job loss in the oil & gas sector, here are some lessons learned during and since the financial crisis.

To get through the latest bear market, I thought it would be fun to go through an exercise that will surely make you feel better. The exercise is a gratitude journal for money.

Simply write down all the things you spent money on that could have been invested in the stock market instead. That is the amount of money that you spared from getting torn to bits by the big bad bear.

Hopefully everybody has been practicing taking some profits here and there to pay for a better life for the past several years. Money is meant to be spent. Otherwise, there’s no point saving and investing if we’re just going to hoard all our money until we die.

The period to record all your spending includes how far back in time the current bear market has reset to. For example, perhaps the S&P 500 has declined by 30%, bringing it back to a level not seen since three years ago. Therefore, count all your spending from then until now to see how much you’ve not only spared, but also enjoyed.

Ironically, the bigger a spender you’ve been, the better you should feel. Frugal minimalists get the short end of the stick during a bear market. Not only did they not spend their money to pay for a better life, but they also lost a lot of money on their investments.

Warning: If you are experiencing tremendous financial hardship and stress, the examples in this post might piss you off. If you still want to proceed, please focus on your own examples.

During the last downturn, I lost about 35% of my net worth in about six months. I don’t plan on doing that again. I want to share how we can make lots of money during the next downturn, which is happening right now in 2020.

Losing 35% is not as bad as the S&P 500 losing ~60% during its worst period, but it still hurt like hell due to the speed and absolute dollar amount of the loss.

At the end of February 2020, the S&P 500 lost 10% faster than any other 10% correction in history. The the S&P 500 proceeded to collapse by 32% in March as the coronavirus pandemic grew. As a result, if we are equity investors, we must be extremely vigilant in guarding our net worth. 

Realistically, my target net worth growth scenario during a recession is to stay flat – neither make nor lose money. This is the first rule of financial independence. But my blue sky scenario is to actually try and make lots of money as the world collapses all around.

Here’s how I plan to do it and how you might too if you’ve accumulated enough money or are planning to retire within the next five years.