Hello, everybody, it's Sam from Financial Samurai. And in this episode, I want to talk about active versus passive investing, because I got a pretty good comment from my post on how I'd invest a million dollars today. And the comment asked from Rijigo, "The financial advice media and literature affirm over and over that we should not try and time and outguess the market.

They say that even experts and fund managers often underperform it. This opinion is so common, it sounds like a consensus. But we also have blog posts such as this one, which advocate the opposite. And they are received as just as sound advice as the other type. So what is the resolution of this apparent contradiction?" This is a very good point.

And I've written before that passive index investing will outperform active fund managers for both equity and fixed income over time. It's very clear in the data, which is also why I recommend the majority, the large majority of your investable assets go into passive index funds or ETFs. This is for your public equity investments.

But why don't I have 100% of my public equity investments or public bond investments in these index funds or ETFs? It's a conundrum, isn't it? So my response to this commenter was, "Well, that's why this post is not investment advice for you. It is how I'd invest a million dollars today and how I have invested a million dollars in the past.

I'm a writer, not a wealth manager or financial advisor." Right? Let's make this clear. I write on Financial Samurai, my own site, to share my thoughts and my experiences. This is not investment advice to you because we're all different. We all have different risk tolerances, abilities to make money, different stages of our lives, different goals.

So I told Rodrigo, the commenter, "If you want tailored financial advice for your household, I would just hire a fee-only advisor so he or she can look through your specific financial situation, look at your specific asset allocation and goals, and come up with a plan." This is the right way, I believe.

And if you don't want to hire a fee-only advisor, talk to a trusted confidant, your friend or family member, and lay all your finances bare and your dreams and your goals bare so they can offer some objective, as objective as possible, feedback. Because when it comes to risk assets, there are no guarantees at all.

2020, a wild year. Tanking market in one month and then just rebounded quite quickly thereafter. 2021, a super bull market. 2022, a bear market. And 2023, a rebound. It's hard to figure out the short term, but over the long term, if you have a proper asset allocation and you have a consistent plan to keep saving and keep investing, I think you're going to be okay.

I think we're going to be okay. So I thought my response was clear and good enough. However, Rodrigo responded, "Hi, Sam. I'm not sure I understand your reply. My point was not about my own investments or wishing to get financial advice from you. I was just pointing out an apparent contradiction that I note in the investment literature online, the constant affirmation that passive investment is better, but also the constant act of investing.

Thank you for the link to your other post. It indicates that the apparent contradiction even in yourself, because you also say the passive is better, but are actively investing. To be fair, in that post, you do provide reasons for actively investing. One hope, two marketing, three pedigree. You also say we all like to dream, but aren't these kind of weak reasons?

I'm trying to understand why you invest actively, not as a provocative or insulting question to you, whom I appreciate and very much respect. But just out of curiosity, why do you invest actively? Is it just a kind of fun? Isn't that kind of expensive entertainment though?" So this response is one of the reasons why I have to be careful responding to comments, because it can often go down a rabbit hole where I don't respond as thoroughly as possible, so it might be critiqued even more, and I've got to spend more time responding.

And so it just goes on and on. And I'm trying to be really protective over my time, because we have so little of it. So as a result, what other people do in my situation is actually don't respond to comments at all, or remove comments. But I like the interaction.

I like the challenge. And please feel free to criticize me as much as possible. And if I see something that is warrant of a response, I will. So my reasoning for why I still invest actively, a minority percentage of my investments, is due to the chance that I could outperform.

When I was 22 years old, I turned $3,000 into $155,000 within six months. It was a company called Vertical Integration Systems, ticker symbol VCSY. And it was during the 2000.com boom while I was sitting at the trading desk at Goldman Sachs. It was a nascent Chinese internet company with a dial pad on the homepage.

And I thought to myself, given I was sitting on the international equities desk, "Hey, the internet, China, sounds like a no-brainer. Let's buy $3,000 worth." I told my friends on the trading desk they bought. They talked to their friends on other trading desks at other major Wall Street homes.

And then they bought. And then the stock just went up, up, up, and up. So at one point, the $3,000 position went to about $175,000, maybe $180,000. And then it started dropping. So I got out with $155,000 gain. I then parlayed that money into a down payment on a condo in 2003 that cost $580,000 in San Francisco.

So these investments helped enable me to quit the rat race in 2012 at the age of 34. Because if I had just invested in index funds, I wouldn't have been able to. Why? Because the stock market was a lost decade from about 2000 to 2010. It just went nowhere.

And I left in 2012. So my experience making active investments, stock picking, buying real estate, have been generally positive. I've definitely lost a lot of money as well trying to pick stocks like this one company called Gas Star that I think lost me like $50,000. I've had definite landmine blowups, shrapnel in my face.

But because of these two specific investments, investing in San Francisco real estate in 2003 and investing in VCSY in late 2019 for four or five months, I'm going to continue to try to actively invest because I have this belief that I might strike gold twice or three times or four times.

I know for a fact that I cannot outperform the masses who invest in index funds or index ETFs. And my clear goal is to outperform because if everybody is making a million dollars a year and has a 20% return every single year, and that's what you make and that's what you return, well, you're not improving your financial situation and potentially your lifestyle relative to others because in finance, everything is relative.

So I'm willing to risk losing money by actively picking investments on some of my capital for the opportunity to outperform. And if I don't outperform, well, I only have myself to blame. I only have my poor decisions, my lack of due diligence, bad luck. Well, bad luck is blaming something else.

So no, bad luck doesn't count. Other ways I could outperform and so can you is to increase your rate of saving, increase your investments in real estate, leverage up, invest in alternative assets, speculative assets. There are all sorts of risk assets out there to invest in. I mean, just in first quarter of 2023, you could have said, well, maybe regional banks have been unfairly punished and I'm going to try to step in there with some capital and buy, I don't know, PacWest Bank.

If you did, you could have probably made a lot of money very quickly or you could have lost if you bought and sold at the wrong time. These are the risks we take as investors and we understand these risks and we don't invest more than what we can afford to lose and what we can afford to stomach losing.

And I do want to draw your attention to one post I wrote and I recently updated and it's called the two levels of rich, one of which doesn't rely on index funds. Now that I'm 45 years old, I know a lot more rich people than I did when I was in my 20s, right?

Because my friends have had over 20 years post-college to invest, to grind and to take calculated risks. And all of my friends who are very wealthy, we're talking 10 million plus, 20 million, 50 million, 100 million, 500 million, a billion, none of them got rich investing in index funds over their past 20 to 25 years post high school or college.

They all got rich investing in their business, starting a business, right? Business equity or they were angel investors in other businesses that boomed. And so they basically use their capital to make active decisions and concentrated decisions in companies they believed in. Now a lot of their investments went to zero or lost them a lot of money, but that was the risk that we were willing to take.

And I see this time and time again, folks, just go running in the most wealthy neighborhood during the day and check out the mansions and then go find out who owns these mansions. More than likely, they got rich through building a business or investing in amazing businesses, not investing in index funds.

Index funds to me are almost like a safer, relatively safer way to preserve capital with a chance of beating inflation by 2 or 3% a year. That's how I view index funds right now. And remember, I'm 45 years old with two kids who is focused on capital preservation for the majority of my capital now.

I don't really want to go back to work, although I am itching to go back to work for more of the camaraderie and social aspects to be a part of a team. I appreciate Rodrigo and other commenters' interest in how I invest my money. I'm sure it's interesting. But also remember, it may not be relevant to your situation unless you are very similar to me in age, in goals, in ability to generate income.

What's way more important is yourself, looking at your own portfolio, your own objectives, your own asset allocation. You can look at mine, you can get some ideas of how I'm thinking because I do want to share my thoughts because this is real money for me. This is how I can't make huge mistakes now because I depend on my investments to live more than the average person who is focused on generating income from their day jobs.

I also don't have some type of active investing course for you to buy for $9.99 or $2,000 or whatever it is you see online to make extra money. That's just not me because I don't believe most people will be able to make or outperform actively investing. So in conclusion, please don't lose sight of the reason why you read Financial Samurai or listen to this podcast.

The purpose, the main purpose should be to better your own financial situation and live a better life. I do appreciate when readers and listeners are interested and concerned about how I'm investing my money and what I'm doing. And if you see something egregiously wrong, please let me know in the comment section.

It'll be really helpful. The more cogent and thoughtful your argument is as to why you think I shouldn't do something is very helpful because I always have blind spots and I'm always looking to learn from other perspectives. I really appreciate it. The great thing about investing is that it's pretty accessible to a lot of people.

You either are satisfied with your investment results or you're not because the numbers don't lie. The returns don't lie. And in terms of money overall, you're either satisfied with the money you have at the age you are at right now or you're not. And if you're not satisfied, you're going to do things to increase your chances of being satisfied.

Thanks so much everyone. Please sign up for my free weekly newsletter at FinancialSamurai.com/news. If you want to learn how to negotiate a severance, check out FinancialSamurai.com/hteyl for how to engineer your layoff. And if you'd like to read a great personal finance book that's also a Wall Street Journal bestseller, check out Buy This, Not That at FinancialSamurai.com/btnt.