While recent history shows that active funds that focus on U.S. This is particularly true over the long term ( See Sidebar: A Mixed Track Record for Actively Managed Funds.) Arguing the meritsīut that does not necessarily mean that passive investing is always the right choice. But passive investing advocates point out that, more often than not, active funds fail to do so and in fact underperform relative to their benchmark market indexes. The biggest advantage of active funds is that they have the potential to beat the market by relying on professionals. Because they rely on expert analysis of possible investments, their costs are often higher - sometimes substantially higher - than those of their passive counterparts. Managers usually buy and sell securities more frequently, which generates taxable transactions, which could lower the amount available to invest. Choosing securitiesĪctively managed funds, on the other hand, generally rely on rigorous analysis to evaluate individual securities and create a portfolio designed to beat, rather than match, a market index. For instance, the manager of a fund that tracks the Russell 2000 index has made an active decision to limit the fund’s holdings to the 2,000 smallest stocks in the broader Russell 3000 index - a fraction of the securities available worldwide. Unless fund managers buy every security in the world, by definition they are taking an active role in the fund’s investment choices. On the other hand, passively managed funds can lack the upside potential of actively managed funds due to a lack of flexibility.īut a passive strategy does not mean there is no decision making regarding investments. Since their performance generally matches the performance of the relevant index, they usually have relatively less downside risk than actively managed funds.Their costs are typically low because they rely on formulas or algorithms rather than paying a team of analysts to evaluate individual companies.They are highly tax-efficient because trading is kept to a minimum.

Passive funds typically have several advantages: Aggregate Bond) by buying and holding all, or a representative sampling, of the index’s securities. Generally, passively invested funds are designed to track the performance of a particular market index (such as the S&P 500 or Bloomberg Barclays U.S. So, for example, a hands-off approach toward your portfolio is not passive investing if you place your assets in actively managed mutual funds. Rather, it signals the investment approach taken by fund managers or financial advisors. “Passive” does not refer to individual investors’ roles in managing their portfolios. Related Read: Active Versus Passive Investment Funds: Should You Let Participants Decide? Tracking an indexīefore defining what passive investing is, it is helpful to explain what it is not. Before choosing or changing an investment strategy, learn more about active and passive investment strategies. As with most investment choices, the right strategy for you will depend on several factors, including your financial goals, investment expertise, time horizon and tolerance for risk. Both strategies have supporters and critics and many experts advocate combining both approaches in a portfolio. Stock market volatility during the last couple of years has reignited a long-running debate over active versus passive investing.

Hands off investment