Why is it a bad idea to combine both active and passive investing strategies?

Question

Common advice given is that if you decide to become an active or passive investor, you should stick with the choice you've made. That you're less likely to be successful if you try to pursue both active and passive investing strategies.

But why is it a bad idea to combine both strategies? For example, passively invest in index funds, but when an opportunity arises where it seems that you'll make a lot of money by actively trading, go with that strategy instead? For example with recent events, people are betting heavily against the S&P500, as we're still in the beginning stages of the coronavirus pandemic as of this writing.

Answer 1

Common advice given is that if you decide to become an active or passive investor, you should stick with the choice you've made.

No you shouldn't. It is perfectly fine to supplement an active portfolio by passive index funds, or to supplement an index fund portfolio with several carefully chosen stocks.

What is bad advice is to buy lots of various active funds (leading to index returns, because there are so many of the active funds, without low costs of index investing). If you believe in active investing, you should select only a fund or at most two in the same market, having fund managers you can trust.

What is also bad advice is to buy quasi-active funds, funds that claim to be active but don't really take any active risk because the fund manager fears losing to the index return. In this case, too, you pay for active management but get passive returns.

Let me propose a case where you could supplement an index portfolio with some actively chosen stocks. If you, for example, like traveling a lot more than most people. Unfortunately, traveling uses oil, so it might be a good idea to buy stocks of oil companies. Traveling also requires aeroplanes, so it might be a good idea to buy aeroplane manufacturer stocks. You of course travel with an airline, so it might be a good idea to buy airliner stocks.

Or, if you drive a lot with an electric car. In this case, it might be a good idea to supplement your index portfolio with stocks of Tesla and electric utility companies, especially those that produce electricity with fixed cost structure like hydropower or nuclear power.

Let me also propose a case where you could supplement an active portfolio with some index funds: you run out of ideas. Simply said. You have so much money to invest but you can't find any companies where you would like to increase your ownership. In this case, it's perfectly fine to buy index funds. Or, you could hire a monkey to throw darts into a list of stocks to select new investments for you. But it's much simpler to buy index funds than to hire a dart-throwing monkey.

Answer 2

Common advice given is that if you decide to become an active or passive investor, you should stick with the choice you've made. That you're less likely to be successful if you try to pursue both active and passive investing strategies.

Do you have a source for this? That advice is so very wrong. It suggests, that once you make a choice you can never ever change your mind.

While it is perfectly fine to be a 100% passive investor almost no one should be a 100% active investor for anything but a trivial portfolio.

We all have specialties. For one person it might be emerging technology and he may actively trade in stocks in that sector. If so, they should probably do their bond allocation passively and perhaps other equity sectors.

A more common approach and more sage advice, for most of us, is that no more than a certain percentage of your portfolio should be actively traded. For me, I like to keep my single stock ownership less than 5%, and my actively managed funds less than 30%. YMMV but having a mix is fine, and being 100% passive is fine. What is not fine is being 100% active.