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 is strongly supported by Jack Bogle
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 fees are lower
- Active Managers are unable to beat the market
Passive Investing Criticisms
- Passive investing is a free-riding strategy: It doesn't help with price discovery
- 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)
- In May 2017 the number of indexes rose higher than the number of individual stocks!
- Equity Index funds grew to 4.6 Trillion in 2018
- Index Fund Assets grew to 6 Trillion in 2018
- Rapid increase over time:
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