Passive Investing ? The Best Approach To Investing

The reason for taking the passive investing route to portfolio management is none other than playing the probability game. Let me quote from David Swensen?s ?Unconventional Success? book. ?Security selection may provide substantial excess returns for skilled investors, but those excess returns come directly from the pockets of other players who suffer poor relative returns. When aggregating the returns for all actively managed portfolios, the combined results inevitably mimic the market, less a discount equal to the amount paid to play the game. For the investment community as a whole, security selection plays a return-reducing role in investment performance.? Swensen is simply stating what William Sharpe proved in his ?The Arithmetic of Active Management? paper.

If you are one of those individuals who knows you can outperform the broad market by active management over the next 20-years, then by all means, keep selecting stocks. However, the laws of probability are working against active managers. For this reason, we are taking the passive or at least, index investing route. Depending on definitions, there is a slight distinction between passive investing and index investing.? Index investing is a subset of passive investing.

Here is a short piece on Swensen and more of his advice. I prefer to listen to David Swensen rather than Jim Cramer.

http://www.informationarbitrage.com/2007/06/why_i_love_dale.html

This post was missed by too many readers when it was first posted and that is why I am bringing it forward.

This post has already been read 42 times!

Source: http://itawealthmanagement.com/2012/08/18/passive-investing-2/

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