What is passive investing?

What is passive investing?

Passive investing relies on market indices and unmanaged approaches to investing, with the idea being that attempting to beat the market is futile, especially if such attempts involve fees and speculation.

Passive investing favors buy-and-hold strategies using no-load, low-fee index funds and other securities meant to be held long-term, in a portfolio allocation suiting the investor that will usually be rebalanced over time to prevent overweighting anything.

Passive investing is more popular now than ever before, and has begun to overshadow its counterpart, actively managed investing. The argument is frequently made that active managers may beat the market a few years here and there, but they do not do so consistently over longer time periods, and that any gains over the index are usually eaten up by the manager's fees.

Some arguments in favor of active management could be made, in reference to certain asset classes in which educated management can exploit inefficiencies in prices to generate alpha, yet with more and more sophisticated algorithms which allow computers to mimic traditionally active investment styles, even this argument is going out the window.

True passive investing would favor the idea that even if markets aren't always 100% efficient, they're going to be more efficient in the long run than a strategy which wastes a lot of energy searching for and attempting to exploit inefficiencies. They see the markets in derivatives and day-trading as an industry which isn't creating any real value in the economy.

What is the Difference Between Active and Passive Money Management?
How Often Do I Need to Rebalance My Portfolio?
What is Active Management?