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)