Passive Investing is generally defined as an approach which minimizes asset selections and allocations. It tries to avoid market timing considerations or even portfolio composition.
An index based on the S&P500 is a practical example of passive investing. The security selection process is reduced to maintaining the proper proportions of the prevailing 500 issues which comprise the index. Security substitutions occur when a firm is removed from the list of 500 and another enters in its place.
Other passive investing benchmarks include:
- Intermediate Corporate Bond Funds
- Long Term Corporate Bond Funds
- Mortgage Backed Securities Funds
- NASDAQ 100 Funds
- Small Cap Market Funds
- Total Market - Stocks or Bonds - Funds
Decision making is reduced to rule oriented essentials. Investment decision making based on expectations of potential values, growth, dividends, mergers and other market factors are neutralized.
Sometimes, Passive Investing occurs because of an inheritance or investment inertia. Nevertheless, there should be an awareness as to what is invested to structure a balanced portfolio or arrange assets to match life-style requirements.
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