Passive Is Easy to Understand and Hard to Live Through

I've spent thirty-odd years as an active market participant, and I still think passive indexing is the sensible starting point for most people. There. Said it.

But I'd add something the evangelists tend to skip. Passive is simple. It is not easy. The strategy asks you to do nothing at precisely the moment every instinct you own is shouting at you to do something.

What "doing nothing" actually requires

A passive portfolio still needs decisions. Which index, which mix of Australian and global, how much in shares versus defensive assets, when to rebalance, and what you will do when the whole thing is down 30 per cent. That last one is the strategy. Everything else is setup.

Morningstar's annual "Mind the Gap" studies of US funds keep finding the same thing: the average dollar invested earns less than the fund it sits in, because money tends to arrive after good runs and leave after bad ones. Same fund. Worse investor result. The index didn't fail anyone. The holding period did.

The 20-year observation, and what it leaves out

You'll often hear that Australian shares have never lost money over any rolling 20-year period. Before leaning on that, ask four questions.

• Which index? A price index and an accumulation (total return) index tell very different stories.
• Dividends in or out? In Australia, dividends are a large part of the return. Leave them out and the picture darkens fast.
• Nominal or real? A positive nominal return can still be a loss after inflation.
• Index or investor? The index doesn't pay fees, tax, or sell in a panic. You might.

Here's the local example. The All Ordinaries price index peaked in November 2007 and took roughly twelve years to get back there. An investor who reinvested dividends recovered years sooner, because the income kept buying units through the slump. Same market. Different measurement, different experience.

Japan is the counter-example

The Nikkei 225 closed at its peak at the end of 1989. It did not close above that level again until 22 February 2024. That's more than 34 years on a price basis. Dividends shorten the wait considerably, and a Japanese investor buying steadily through the 1990s and 2000s had a far better outcome than one who bought everything at the top. But it is a real, large, developed market where "just hold the index" meant decades of pain for a lump-sum buyer.

The point isn't that Australia will become Japan. It's that the long-run numbers come from markets that happened to work out, and one country is a small sample. Global diversification is the passive investor's main defence against being the unlucky one.

The ASX is not as diversified as it looks

Buying "the market" in Australia means a heavy weighting to banks and miners. A handful of companies make up a large share of the ASX 200. That's a sector bet in index clothing. Plenty of Australians hold it alongside an investment property and a job in financial services, then wonder why every bad year feels the same.

Where it goes wrong in retirement

For an accumulator adding money every month, a crash is a sale. For a retiree drawing income, the same crash forces units to be sold at low prices, and those units never take part in the recovery. That's sequence risk, and the standard "buy and hold" script says very little about it. A drawdown plan with a cash buffer isn't an add-on. For a retiree, it is part of the passive method.

Who tends to find it easier

People who held through 2008 or March 2020 without selling, whose contributions are automated, and who really don't mind owning an average result. If you checked your balance daily during the last sell-off, that's not a disqualification. It's information. Many people run a lower share allocation than they think they can handle, precisely so they can keep the plan when it hurts.

What to do with this

Write one sentence and stick it somewhere you'll see it: "If my portfolio falls 30 per cent, I will ___." Then check it against what you actually did in the last fall. If the two don't match, adjust the allocation, not the sentence.