Step 1: Active Investors
There are sharp contrasts between the behaviors of passive investors and active investors. Passive investors don’t try to pick stocks, times, managers, or styles. Instead, they buy and hold globally diversified portfolios of passively managed funds. The term “passive” translates into less trading of the fund’s portfolio, more favorable tax consequences, and lower fees and expenses than actively managed funds. A passively managed fund or index fund can be defined as a mutual or exchange traded fund (ETF) with specific rules of construction that are adhered to regardless of market conditions. An index fund’s rules of construction clearly identify the type of companies suitable for the fund investment. Equity index funds would include groups of stocks with similar characteristics such as size, value and geographic location of company. A group of stocks may include companies from the United States, foreign countries or emerging markets. Additional indexes within these markets may include segments such as small value, large value, small growth, large growth, real estate, and fixed-income. Companies are purchased and held within the index fund when they meet the specific index parameters and are sold when they move outside of those parameters. Think of an index fund as an investment utilizing rules-based investing. Figure 1-1 illustrates the different characteristics between active and passive investing. Introduced in the early 1970’s, index fund investing has caught on, and for good reason. As the chart shows, index fund investors have fared better in returns and incurred lower taxes and turnover than active investors. They are also able to invest and relax.
Published on Jun 1, 2015
This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...