Smart beta really is nothing new – an interview with Michael Batnick (2/2)

Posted by Robin Powell on December 10, 2015


Michael Batnick from Ritholtz Wealth Management writes one of the most popular investing blogs for Millennials, The Irrelevant Investor. In the second and final part of our interview, Michael explains his belief that there’s probably never been a better time to be an investor than today.


One of the big developments we’ve seen over the last 12 months is the growing popularity of smart beta, and a move away from the old “active versus passive” debate. What do you make of that?

That debate has been going on since the beginning of time, and it will never go away. Index investing is gaining more traction and it’s becoming a bigger part of the investment universe, but there are a lot of subtleties. I mean, no one is truly passive; you have to be active to a certain degree. In other words, even if you’re not actively trading, you have to make some decisions. Does this make you an active investor? I don’t think so. If you go outside and you don’t bring an umbrella, are you actively saying that it’s not going to rain? No, there are just some decisions that you have to make. There’s certainly been a big revolution around smart beta, and breaking away from the traditional cap-weighted indexes. So you can weight by the dividend stream, or you can weight by other fundamentals such as price-to-earnings or what have you. There’s a big surge of these sorts of funds coming to the market. But the truth of the matter is that smart beta is just factor investing, or tilting to value stocks and small stocks. Much of the returns derive from those two factors, which have been around for decades. 


So, what’s your opinion of smart beta? Is it a good idea for a typical investor?

Assuming that you understand the pros and the cons of the strategy, there’s nothing wrong with breaking away from the traditional cap-weighted index. The most important thing, when putting together a plan, is to understand the pros and the cons. Smart beta did not save you from this summer’s downturn. It didn’t save you from October 2014. It’s not going to. Any of the smart beta strategies work on their own over a reasonable period of time, but to think that you’re going to beat the market over a one-, two- or three-year period is really misunderstanding what the products do. If you can build a portfolio that you can stick to, that’s probably more important than the strategy itself. But I think people who’ve been chasing active mutual fund managers will do the same with these smart beta products. Therein lies the danger.


You mentioned the correction in the summer, and the market has been wobbling ever since then. How should people respond, if at all, to the current uncertainty?

I suggest that investors have a plan. If you don’t have a plan, get a plan and stick to it. Assuming that they have a plan in place, investors shouldn’t respond to what’s been happening. People often tend to scoff at the phrase “stay the course” during market corrections. However, people who are saying, Stay the course, are assuming that you have an actual plan in place. We tell our investors to stay the course because we have a plan for them. So we’re not telling them to buy and hold and forget about it. You should never allow the movement of the market to determine how you react. If your needs haven’t changed, you shouldn’t do anything. Are we in the correction, or out of the correction? I don’t know. But I would say that the most simple way to explain what’s been going on is that bad things tend to happen in healthy markets. Selling begets more selling. It’s really hard to nail down the reason why sell-offs occur, and for most people it doesn’t really matter.


Are you optimistic about the future of investing?

Absolutely. I’m incredibly optimistic. Access to great companies and resources has never been so readily available. I don’t think there’s ever been a better time to be an investor. Everything has become much cheaper. I would say that perhaps there’s too much information available and that could lead to over-trading and too much turnover. But take the robo advisers, for instance. I think they’re absolutely fabulous. They introduce young people to how to invest. But it’s one thing to know that the market goes up and down, and another thing to watch your account balance go up and down. So there’s a whole argument that people are going to need an adviser, a human being, when the market starts to get turbulent. And I think that’s true for older people with more complex needs, but also for younger people whose account balances are $50,000 and under. If the market goes down, it doesn’t matter. In fact, younger investors should be praying for the market to come down. Who wants to keep buying at new all-time highs?


In case you missed Part 1 of this interview with Michael Batnick, here it is:

How I learned to invest the right way — an interview with Michael Batnick (Part 1)



Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.


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