The Skinny On Options Data Science

Volatility Hurts Passive Investing

The Skinny On Options Data Science

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

We strongly believe that you should take control of your finances and instead of a passive, buy-and-hold approach, put your money to work trading our way. You may have seen articles or heard of people who tout passive investing winning over the long run (which we dispute), but they also rely on unrealistic assumptions. Michael Rechenthin, Ph.D. (aka Dr. Data), the head of our research team joins the guys to use logic and the tools of Data Science to make it clear that passive investing is a mistake.

The foundation of the argument that passive investing is superior is based upon a falsehood. It assumes that every investor can afford to invest at regular intervals and to leave the money untouched for decades. Mike displayed a slide of a sequence of returns. It’s an argument for passive investing. When there are no deposits or withdrawals the sequence is meaningless but it’s unrealistic to expect no deposits or withdrawals. Mike made this clear by displaying another slide with a list of everyday life expenses that can not only interrupt deposits to an account but can also lead to withdrawals. Events like marriage, purchasing a home, education costs for kids and medical expenses. When an account has to factor in realistic deposits and withdrawals, passive investing doesn’t look nearly as good.

When a passive investing approach has a large loss one year under the goldilocks scenario promoted by its advocates it’s not a big deal. When viewed under a more realistic scenario or real life events, the volatility of returns that may produce a 40% loss one year would have to be followed by a 67% gain the next year in order to recoup the loss. How likely is that when using passive investing? Mike showed that when money is deposited or withdrawn will have an impact on buying a selling. Should deposits be made and a stock index be purchased near the highs but then sold near the lows when funds are needed the results can be devastating. Market declines are not uncommon and a more active approach can help to reduce basis.

Watch this groundbreaking segment of The Skinny on Options Data Science with Tom Sosnoff, Tony Battista and Dr. Data, aka Michael Rechenthin, Ph.D., for the important takeaways and a realistic examination of passive investing that you will find convincing.

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