Misconceptions In Passive Investment There is a big amount of false info that’s been circulating about the subject of active and passive investment. As a matter of fact, it stirs a lot of debate to many for quite some time. Aside from that, there is also much on the line from salaries of fund managers […]
Misconceptions In Passive Investment
There is a big amount of false info that’s been circulating about the subject of active and passive investment. As a matter of fact, it stirs a lot of debate to many for quite some time. Aside from that, there is also much on the line from salaries of fund managers to retiree’s savings. What’s unfortunate for investors is that, it is not possible to try out other investment opportunities. Instead, choosing a strategy has to do with great deal of analysis and research. Regardless if you are rooting for active or passive, it is extremely important that you make yourself aware of the facts from fiction in order to come up with a well informed decision to how you can invest your hard earned money in the best way possible.
To help you refine the debate between these two subjects, here are some facts that can clear up your doubts in passive investment.
Number 1. There is no action – if only passive investing was so basic like placing money in index fund and wait for all money to roll in. Believe it or not, the passive investors may even become performers of portfolio observation, discipline and construction.
The action starts by allocating money strategically among the varieties of asset classes that help in attaining long term financial goal when developing a portfolio together with passive investments such as index funds. If those allocations change, more action is to be found with the passive investor particularly to those who rebalance their portfolio diligently by making trades return to assets back in their original level.
Number 2. Passive investing attains returns that are below market averages – it is true that primarily because of the cost but, average returns are in the eye of investors. Index funds are seeking to replicate market index so even if they do accurately, it will still be below average for the net of fees. However, index funds usually have lower costs when compared to active funds or to put simply, they have better chances to get near market averages for a long period of time.
Active funds are charging higher fees as well for personnel to do research and trades which eats away at returns as well as contribute to abysmal historical record of either matching or beating market averages.
Number 3. Passive investing is deemed as cookie-cutter strategy – due to the reason that passive investment is not managed tactfully to change with market swings or to take advantage of future events, many detractors of it believe that it can’t beat active investment. The truth is, the same strategy may be applied from different investors which is one notable benefit of passive investing.
Quotes: my latest blog post