Myths About 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 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 is that simple to the point that you just need to place money in index fund and wait for all money to roll in. The truth is, passive investors can work as performers of portfolio observation, discipline and construction.
When developing a portfolio together with passive investments similar to index funds, the action begins by allocating money strategically among varieties of asset classes that can help in achieving long term financial goal. If ever these allocations change, then more action is to be found with passive investors who rebalance their portfolio diligently by making trades return to assets back into 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. On the other hand, index funds normally have lower costs compared to active funds meaning, they have better probabilities of getting near market averages for a long period of time.
In addition to that, active funds charge higher fees for personnel to carry out research and trades which eats away at returns as well as contribute to abysmal historical record to match or beat 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. The truth is, the same strategy may be applied from different investors which is one notable benefit of passive investing.