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Passive Investing

Passive Investing is an investing strategy whereby investors purchase market-weighted indexes or portfolios without picking individual stocks/sectors or conducting due diligence and research.


Passive Investing Benefits:
  • Has a cost advantage
  • Good for people who don't have the time/expertise to analyze individual securities or sectors
  • Some like Jack Bogle believe that it is better than active investing

Passive Investing Criticisms
  • Passive investing is a free-riding strategy:  It doesn't help with price discovery
    • Passive investors don't bid up high performing companies and bid down low performing companies
    • Passive investors bid up all companies or bid down all companies at the same time
  • Too ma y funds have been sitting idly, not paying attention and investing in everything
    • Has grown to Trillions under management (2018)
    • Investors "not paying attention" is usually a good setup for an upcoming crash
  • Passive investing will stop working once too many investors are passive
    • If there is no one to actively set prices, passive investors will buy no matter companies are in good or bad shape
    • There will be no one left to sell certain companies when they are overvalued and buy bargain companies when they are undervalued compared to the rest of the group
    • If passive investors decide to sell, a feedback loop could be triggered that causes stocks to crash
    • This is a becoming a more serious concern as passive investments have grown since 2009 while active investments have shrunk
    • Institutional Investors that manage indexes now have voting control of many corporations (impacts corporate governance)
    • Passive Investing has gotten too big to work - there is no price discovery anymore (good and bad are purchased)



    Warnings and Disclaimers

    The information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not designed to meet your personal financial situation - we are not investment advisors nor do we give personalized investment advice. The opinions expressed herein are those of the publisher and are subject to change without notice. It may become outdated an there is no obligation to update any such information.

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