Top 7 Benefits Of Passive Management


We've looked at active management in the previous post, let's look at passive management.

Passive investment, also known as index investment, is an investment method that aims for investment results similar to the price movements of the entire market.

If we aim for investment results linked to the NASDAQ Average as an example of the rise and fall of the benchmark market index, we expect the same investment results as investing in all about 5,000 stocks listed on the First Section of the NASDAQ. It is said that it will be done.

It is an operation method based on the idea that the market is more efficient than paying the active cost.

Read More on Active Management: Top 6 Benefits of Active Management

7 benefits for passive management

Passive is a word that means passive in English and has the meaning of being paired with active. Since we are aiming to link the market index, this is an investment method that we do not actively invest.

Here, we will introduce seven points of passive management.

Passive operation point 1: Clear standards and easy operation

Passive investment is based on the idea that it is difficult to outperform the market.

Since we are aiming to link to the market index, the fund name may have "index fund". If the target market index rises, the investment results will also rise, and if it falls, it will fall, which is a simple and clear investment method.

It has the advantage of being easy to operate because it is possible to know market trends by looking at news.

Passive operation point 2: Low cost and risk for operation

Passive operations keep costs low.

This is because we rarely buy and sell as often as in active management, and in most cases we will continue to hold stocks unless the composition ratio of the target index and stocks change significantly. In addition, management fees are set low because there is no need to investigate and analyze individual stocks.

In addition, it is said that the risk is lower than active management because the investment results are not affected by the skill of the fund manager.

Passive management point 3: Not disturbed by the ability of fund managers

There are two approaches to passive management. A method of holding all the constituent stocks of the target index with the same composition ratio (complete method) and a method of selecting and holding representative stocks that reflect the main characteristics of the index (industry allocation, dividend yield, risk, etc.) ( Sampling method).

In each case, it is based on a simple principle and is less dependent on the ability of the fund manager.

Passive investment point 4: Risk hedging is difficult

Passive-managed funds aim to be linked to the target index, so if the market as a whole declines, so does the value of the fund. Therefore, unlike active management, it is unlikely that risk hedging will be carried out under the guidance of a fund manager.

In other words, you need to keep in mind that even if you know the market is going down, you will not take defensive measures.

Passive management point 5: Little reward

Passive management rarely exceeds the index because it aims for results that are linked to the target index. Therefore, be aware that as long as the investor pays the management fee, the return will be slightly lower than the index itself.

In addition, since we do not actively manage the market, we may only get the average return of the market.

Passive management point 6: It is difficult to feel the enjoyment of investment

Passive investment allows you to diversify your risk by investing in a wide variety of stocks.

However, it may be difficult to feel the enjoyment of investment that is expected to grow because the fund manager does not actively manage the investment.

When looking at the world economy from a bird's-eye view, the theory is that the economy has been on the rise since the past, and it can be said that it is suitable for those who have a stable long-term holding.

Passive investment point 7: Easy to buy and sell with exchange-traded funds

Exchange-Traded Funds (ETFs) are ETFs (Exchange Traded Funds) that are traded only by securities companies.

Similar to index funds, it is a product linked to the index, but investment trusts have transactions at the base price announced once a day. On the other hand, exchange-traded funds can be bought and sold as many times as stocks during the trading hours of financial instruments exchanges.

It can be said that it is easy to buy and sell because you can judge while looking at the market price and the cost is low.

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