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Misconceptions In Passive Investment
There’s a huge amount of false information that has been circulating regarding 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. Rather, selecting a strategy needs great deal of analysis and research. Whether you lean passive or active, it is vital that you recognize the facts from fiction to be able to come up with a well informed decision on how you can invest your hard earned money in the best way possible.
To help refining the debate between the two subjects, here are facts that have to be cleared up regarding passive investment.
Number 1. There is no action – if just passive investing was as simple as 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.
When you are developing a portfolio along with passive investments like index funds, the action starts by allocating money in a strategic manner among varieties of asset classes that helps in achieving long term financial goal. Say that these allocations have changed, more action will be found with passive investors especially those who are rebalancing their portfolio diligently by making trades return to assets back to its original level.
Number 2. Passive investing attains returns that are below market averages – average returns are in the eye of investors even though this is true due to the cost. 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 – detractors of passive investment believe that it could not beat its counterpart or active investments since they’re not managed tactfully to change with market swings or to take advantage of future events. But, there’s actually a benefit from the uniformity of passive investing since same strategy can be applied from one investor to the other.