Passive Investing

Passive investors accept the market's return rather than trying to outperform it through stock selection or market timing. They typically invest through index funds or exchange-traded funds that hold all, or a representative sample, of the securities in an index.

The main advantages are low costs, broad diversification and simplicity. Because passive funds do not need teams of analysts or frequent trading, their fees are usually much lower than those of actively managed funds.

For example, an investor might put money every month into a low-cost fund tracking a global stock market index, holding it for decades without trying to time the market.

Research has repeatedly found that, over long periods, a large proportion of actively managed funds underperform their benchmark indices after fees. This has driven strong growth in passive investing.

Passive investing does have limitations. Investors receive the full market's downturns as well as its gains, and they hold every company in the index regardless of valuation or quality. Some critics also argue that if passive investing becomes too dominant, markets may become less efficient at pricing individual companies.