Why professional trader Tom Sosnoff says to bet on yourself instead of passive index funds

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Passive investing reached a major milestone in 2023. For the first time, passive funds surpassed active funds in net assets, with global assets reaching $13.3 trillion.

Although 2023 saw weak flows after the bear market of 2022, the milestone capped a decades-long trend in how money flows from investors to markets.

But Tom Sosnoff, co-founder of tastytrade and co-founder and CEO of tastylive, has made a career out of believing that investors shouldn’t sit back and relax in passive funds. He earned his trading chops over two decades in the trading pits and another two on the trading screens and is known for his contrarian views.

In a recent appearance on Stocks in Translation, he argued that passive set-it-and-forget-it investing is actually riskier than stock picking and active money management.

“The problem with passive investing,” explained Sosnoff (see video above; listen below), “is that when you start passive investing when you’re young — you close your eyes, take a nap, and wake up at 60 — and you don’t know how markets work.”

Sosnoff believes that passive investing breeds complacency and can deprive the investor of an education in risk management, market mechanics and decision making. In contrast, active trading forces investors to think strategically, take calculated risks and adapt to market changes. Losses are, so to speak, tuition for an education.

The irony of this position in favor of active trading is that it seems to be at odds with the almost constant pace of pro-passive investment advice (such as the one most recently released by this author this week).

However, as William Lock, head of the international equities team at Morgan Stanley wrote in July, “The decision to go passive investing is still an active decision,” adding to emphasize: “There are over 3 million stock indexes in the world – more than 50 times more indices than stocks!”

Sosnoff’s position is clear: market betting, through active participation, provides an education in real-world finance—one that could pay dividends down the road.

Sosnoff also sees the volatility that scares most investors away as an opportunity, thinking it’s “the only true mathematical equation in finance. Price is not mean reversion, but volatility is”.

For the tastytrade co-founder, learning to navigate volatility equips you with the tools to take advantage of short-term inefficiencies, especially through strategies like put options.

The story continues

To be clear, novice investors can face potentially unlimited risk by selling options. But there are also many ways investors can learn to limit that risk, bringing Sosnoff’s arguments back again to education and real-world experience in investing with an eye toward risk management.

Here too, Sosnoff has a unique view of risk, which he sees as exaggerated in finance.

“Risk is something you can’t control,” he said, likening it to the unpredictability of another car hitting you. “The only thing you can control in finance is actually what you do.”

And what you can control, he said, is position size and diversification.

Keeping your size small and spreading your investments across multiple assets, he argues, essentially defines and limits risk. “Anyone can do it,” he assured.

Sosnoff said, “The whole concept of active trading is that you learn how to make decisions. You learn how to take risks. You learn how to evaluate probabilities. Learn how to invest strategically if you want. And then if you don’t want to, you can always come back and invest passively.”

On the Yahoo Finance podcast Stocks in translationeditor of Yahoo Finance Jared Blikre cuts through the market chaos, noisy numbers and hyperbole to bring you key conversations and insights from the investment landscape, giving you the critical context you need to make the right decisions for your portfolio. Find more episodes on our website video hub or follow you your favorite streaming service.

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