Passive Management
| Passive management is an investment strategy that tracks an existing economic index rather than relying on active market exposure. This strategy is often used by investors who believe that the market is efficient and that it is impossible to outperform the market on a consistent basis. Passive management has several advantages. First, it is a low-cost way to invest. Because passive managers do not attempt to beat the market, they do not incur the high costs associated with active management, such as research costs, transaction costs, and management fees. Second, passive management is a simple way to invest. Investors who use a passive strategy can easily understand and implement it. Finally, passive management can provide superior returns over time. Studies have shown that, after accounting for costs, passive portfolios have outperformed active portfolios in a majority of cases. Despite its advantages, passive management has some drawbacks. First, because passive managers do not attempt to beat the market, they may underperform in periods when the market is doing well. Second, passive management may not be suitable for all investors. Some investors may be more comfortable with an active strategy, even if it means incurring higher costs. If you are considering using a passive investment strategy, you should first understand the pros and cons. Weighing the potential advantages and disadvantages will help you decide if passive management is right for you. |
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