The words “active” and “passive” investing have become muddled in a world where more and more people are indexing. In a pure sense the only truly “passive” portfolio is the global financial asset portfolio which holds a market cap weighting of all the world’s financial assets. Anyone who deviates from this is essentially being “active” in that they are claiming that this one true benchmark is some how wrong. Most indexing advocates don’t mimic anything close to the global financial asset portfolio nor should they as this portfolio is not always weighted appropriately for all investors (for instance, at present, it is roughly a 40/60 stock/bond portfolio).¹ The problem is, by deviating from this global cap weighted index, we are all, by definition, actively choosing an asset allocation that deviates from the one true passive “market” index. As Cliff Asness of AQR once said:
“You can believe your strategy works because you’re taking extra risk or because others make mistakes, but if it deviates from cap weighting, you don’t get to call it “passive” and, in turn, disparage “active” investing.”²
Countercyclical Indexing™ is just an alternative form of low fee, tax efficient and diversified indexing. However, unlike a static procyclical index fund we don’t always rebalance back to a static risk assumption. We rebalance to account for the fact that the markets move in a procyclical fashion. In its simplest form, Countercyclical Indexing is just a different form of rebalancing that tends to better align an investor’s risk profile with the actual riskiness of the financial markets over the course of the market cycle.
Most importantly, Countercyclical Indexing is a low fee and tax efficient form of asset allocation that tries to capture the market return given an appropriate level of risk over the course of the business cycle.
¹ Ronald Doeswijk, Trevin Lam, & Laurens Swinkels. 2014. The Global Multi-Asset Market Portfolio 1959-2012
² Asness, Clifford. 2014. My Top 10 Pet Peeves.
- Roche, Cullen “The Myth of Passive Investing“, Pragmatic Capitalism