If passive investing is so successful, why is it that so few investors actually use this approach to construct and manage their portfolios?
Good question and one that likely has a score of answers.
Here are a few to consider:
- There is a large collection of investors who are confident they can beat the market. Ego certainly enters into this thinking. Why would I be investing if I did not think I could outsmart the majority of other investors?
- Index investing does not have "water cooler" appeal. For some reason, discussing specific companies generates more interest than talking about broad asset classes.
- Active investors are influenced by Wall Street buzz and advertisements. Millions of dollars are spent hooking investors and feeding them active management propaganda. This comes from newsletters, business magazines, television business shows, and friends who don't know there is another choice.
- I maintain one of the biggest reasons investors continue down the active management path is that they don't have a clue how well their portfolio is performing when measured against an appropriate benchmark. In addition, they do not take portfolio risk into account. Even if they think about risk, they have no way to accurately measure it.
Remember, you cannot manage what you do not measure!
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