Passive Investing Typically Associated with Index Investing:
Indexing is the process of taking a given market, dividing the individual companies, and putting them into a given category like large-cap companies (think APPLE/COCA COLA). For example, a few categories to look at are large-cap companies with market capitalization greater $10 billion. Market capitalization refers to a company’s value. Then there are mid-cap companies with a market capitalization between $2 billion and $10 billion, and small-cap are companies with a market capitalization between $300 million and $2 billion. Categories of the market are plentiful akin to visiting library and selecting a subject matter you’d like to read, the options are seemingly endless.
The one index category most commonly referenced to as the S&P 500 (Standard & Poors). The ‘S&P 500 category’ is based on the 500 largest companies having common stock listed on two stock market exchanges, the New York Stock Exchange (NYSE) and (NASDQ) National Association of Securities Dealers Automated Quotations. As practice, the S&P 500 index is used as the primary benchmark when comparing an investor’s performance. Earning a return on your portfolio equal to the return of the S&P 500 is earning the average return of the entire market. Now keep in mind an investor has to be invested 100% of their money, into the stock market to make the comparison equal. Index investing can make investing mechanical. This is where we believe good judgement goes a long way because not knowing which index to invest in or what companies make up the index, can result in unexpected returns. When I say returns, I mean how your investments are working for you, so that you can achieve your goals.
Active investing as its name suggests is having a human manager where index investing is not the main investment driver. The investment driver, is to pick a combination of stocks, bonds, or other securities and create a portfolio for their investors. An example of this is buying individual companies, bonds and/or other securities to achieve a stated goal. That goal may not include outperforming the S&P but to produce income or a certain level of risk appetite.
At Kashani Financial Services we believe that neither index nor active investing are inherently flawed or prefer one over the other. Rather the investment/s an investor chooses should be driven by the goals and needs they want to achieve for their lives. Goals can include emergency funding, college planning, retirement planning, or wanting to make a future large purchase.
With this in mind we have included links to informative articles regarding this subject matter. We hope this has been informative and interesting.
Sources & Pertinent Articles:
- Active Investing: https://www.investopedia.com/terms/a/activeinvesting.asp
- Passive Investing: https://www.investopedia.com/terms/p/passiveinvesting.asp
- Bogle Sounds a Warning on Index Funds: https://www.wsj.com/articles/bogle-sounds-a-warning-on-index-funds-1543504551?emailToken=787b237a3abad456943be203ba02702aZb7D94JoZnalRj8c2yM7lVtmUxHWiy9s5NAiyHkNEqvwW23vKtfhJEHSeuQVK9p1ymadLOwU+OkEPq2Aud2ekhqAH45BEZbBKSxoDLqy1x4%3D&reflink=article_email_share
- Wall Street’s Newest Puzzle: What Passive Buying and Selling Means for Individual Stocks: https://www.wsj.com/articles/wall-streets-newest-puzzle-what-passive-buying-and-selling-means-for-individual-stocks-1505986202