Passive management (also called passive investing) is a financial strategy in which a fund manager makes as few portfolio decisions as possible, in order to minimize transaction costs, including the incidence of capital gains tax. One popular method is to mimic the performance of an externally specified index—called 'index funds'. The ethos of an index fund is aptly summed up in the injunction to an index fund manager: "Don't just do something, sit there!" Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... Investment management, also called asset management, fund management or portfolio management is the professional management of collective investments (including insurance and pension funds) to meet specified investment goals for the benefit of the investors. ... In finance, a portfolio is a collection of investments held by an institution or a private individual. ... In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. ... A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of an asset that was purchased at a lower price. ... In economics and finance an index (for example a price index, a stockmarket index) is a benchmark of activity, performance or any evolution in general. ... An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. ...

Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds. Today, there is a plethora of market indexes in the world, and thousands of different index funds tracking many of them. A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... A comparison of three major stock indices: the NASDAQ Composite, Dow Jones Industrial Average, and S&P 500. ...

One of the largest equity mutual funds, the Vanguard 500, is a passive management fund. The two firms with the largest amounts of money under management: Barclay's Global Investors, and State Street, primarily engage in passive management strategies.

Rationale

The concept of passive management is counterintuitive to many investors. The rationale behind indexing stems from four concepts of financial economics:

1. In the long term, the average investor will have an average before-costs performance equal to the market average. Therefore the average investor will benefit more from reducing investment costs than from trying to beat the average.^[1].
2. The efficient markets hypothesis, which postulates that equilibrium market prices fully reflect all available information. It is widely interpreted as suggesting that it is impossible to systematically "beat the market" through active management, although this is not a correct interpretation of the hypothethis in its weak form. Stronger forms of the hypothesis are extremely controversial, and there is some debateable evidence against it in its weak form too. For futher information see behavioural finance
3. The principal-agent problem: an investor (the principal) who allocates money to a portfolio manager (the agent) must properly give incentives to the manager to run the portfolio in accordance with the investor's risk/return appetite, and must monitor the manager's performance.
4. The capital asset pricing model (CAPM) and related portfolio separation theorems, which imply that, in equilibrium, all investors will hold a mixture of the market portfolio and a riskless asset. That is, under suitable conditions, a fund indexed to "the market" is the only fund investors need. In simplistic term this picture picture sourceshould help you visualize the market risk/volatility involved if your portfolio allocation consists of 50% active management & 50% Passive Management.

The bull market of the 1990s helped spur the phenomenal growth in indexing observed over that decade. Investors were able to achieve desired absolute returns simply by investing in portfolios benchmarked to broad-based market indices such as the S&P 500, Russell 3000, and Wilshire 5000. In finance, the efficient market hypothesis (EMH) asserts that stock prices are determined by a discounting process such that they equal the discounted value (present value) of expected future cash flows. ... Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming a benchmark index. ... Nobel Prize in Economics winner Daniel Kahneman, was an important figure in the development of behavioral finance and economics and continues to write extensively in the field. ... In economics, the principal-agent problem treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent. ... Invest redirects here. ... For the record label, see Incentive Records. ... Lets talk about risk control strategies, anyone with more information and willing to share, please do so. ... In finance, the return on investment (ROI) or just return is a calculation used to determine whether a proposed investment is wise, and how well it will repay the investor. ... An estimation of the CAPM and the Security Market Line (purple) for the Dow Jones Industrial Average over the last 3 years for monthly data. ... CAPM may stand for Capital Asset Pricing Model Certified Associate in Project Management This page expands a four-letter combination which might be any or all of: an abbreviation, an acronym, an initialism, a word in English, or a word in another language. ... A bull market is a prolonged period of time when prices are rising in a financial market faster than their historical average. ... The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. ... The Russell 3000 Index is a stock index of US stocks. ... The Dow Jones Wilshire 5000 Total Stock Market Index, also known as the Dow Jones Wilshire 5000 Composite Index or simply the Wilshire 5000 is a broad base stock market index often used to represent the entire United States stock market. ...

In the United States, indexed funds have outperformed the majority of active managers, especially as the fees they charge are very much lower than active managers. They are also able to have significantly greater after-tax returns. One pays a fee as renumeration for services, especially the honorarium paid to a doctor, lawyer or member of a learned profession. ... “Taxes” redirects here. ...

Some active managers may beat the index in particular years, or even consistently over a series of years. Nevertheless the retail investor still has the problem of discerning how much of the outperformance was due to skill rather than luck, and which managers will do well in the future.

Implementation

At the simplest, an index fund is implemented by purchasing securities in the same proportion as in the stockmarket index. It can also be achieved by sampling (e.g. buying stocks of each kind and sector in the index but not necessarily some of each individual stock), and there are sophisticated versions of sampling (e.g. those that seek to buy those particular shares that have the best chance of good performance). An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. ... For security (collateral), the legal right given to a creditor by a borrower, see security interest A security is a fungible, negotiable instrument representing financial value. ... A stock market index is a listing of stocks, and a statistic reflecting the composite value of its components. ... For other uses, see Stock (disambiguation). ...

Investment funds run by Investment managers who closely mirror the index in their managed portfolios and offer little "added value" as managers whilst charging fees for active management are called 'closet trackers'; that is they do not in truth actively manage the fund but furtively mirror the index. Investment management, the professional management of various securities (shares, bonds etc) and other assets (e. ...

Collective investment schemes that employ passive investment strategies to track the performance of a stockmarket index, are known as index funds. Exchange-traded funds are never actively managed and often track a specific market or commodity indices. Funds financial information A collective investment scheme is a way of investing money with a large number of people to participate in a wider range of investments that may not be feasible for an individual investor hence many investors share the costs of doing so. ... A stock market index is a listing of stocks, and a statistic reflecting the composite value of its components. ... An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. ... Exchange-traded funds (or ETFs) are Open Ended investment companies that can be traded at any time throughout the course of the day. ...

Globally diversified portfolios of index funds are used by investment advisors who invest passively for their clients.

Mutual fund investors

Dalbar Inc., a market research company, found that during the 20 years from 1984 to 2004, the average stock fund investor earned returns of only 3.7% per year, while the S&P 500 returned 13.2%. On an inflation adjusted return, the average equity fund investor earned $13,835 on a $100,000 investment made in 1985, while the inflation adjusted return of the S&P 500 would have been $591,337 or 43 times greater.

See also

• Investment management
• Active management
• Buy and hold
• Index investing
• Enhanced indexing
• Relative investment performance
• Value investing

Investment management is the professional management of various securities (shares, bonds etc) assets (e. ... Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming a benchmark index. ... Buy and hold is a long term investment strategy based on the concept that in the long run financial markets give a good rate of return despite periods of volatility or decline. ... Index investing, also called indexing, is a method of passive investing whereby a fund (or individual) buys the same stocks in the same proportions as in a target index. ... Enhanced Indexing is a catch-all term to a list of modifications to index fund investing that emphasize on performance rather than market tracking. ... Relative investment performance (or relative return) is a mode of portfolio management that tries to get a close but better performance than a market index. ... Value investing is a style of investment strategy from the so-called Graham & Dodd School. ...

References

External links

• March 2004 - The Future of Investment Management - article