What is “Passive” investing?

Posted by dfederman on Dec 15, 2011 in Investor Education | Comments Off

Passive investing is an investment style in which investors:

1. focus on the ways markets are correct, rather than trying to take advantage of the ways markets are mistaken.
2. view markets as an ally and try to take advantage of the ways markets compensate investors.
3. believe exposures to risk factors [market (stocks vs. T-bills), size (small stocks vs. large stocks), and price (high/low book-to-market)--or (value vs. growth)] — collectively do the best job pinpointing the sources of investment risk that account for stock market returns.
4. focus on costs, which significantly affect net returns and are one of the few areas investors can control.
5. believe investments need not be complicated or exciting, just effective.Because capital markets work and generate long-term positive returns, you can set expected return targets. For many investors, investment risk is a preference, and your portfolio objectives determine the amount of intentional risk you need to capture. Ultimately, everyone’s financial goal is to be financially secure.