Overview: Many investors may believe that passive investing means simply buying index funds. However, there are some key differences between index investing and passive asset class investing. The following discusses some of those differences.

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Many investors realize that a passive investment approach offers many benefits when compared with an active investment approach. Passive investing involves buying and holding market components, whereas an active investor or fund manager tries to pick the next winning stock or time where the market is headed next. A passive approach offers these major benefits:

To implement a passive investment approach, investors can choose from:

Investors may wonder, “Why shouldn’t I just buy index funds instead of passively managed asset class funds? What is the benefit of passive asset class management versus ‘index’ investing?”

 

The historical evidence has shown that index investing and passive asset class investing are superior strategies to investing in individual stocks or actively managed mutual funds. But building a portfolio of passive asset class funds expands upon the benefits of index investing while minimizing some of its potential negatives.