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> This isn't taking into account that there is really no such thing as 'passive'. In reality, passive investors are constantly either investing with their paych

> This isn't taking into account that there is really no such thing as 'passive'. In reality, passive investors are constantly either investing with their paycheck, or selling in retirement. They are the world's simplest active investors. If you put money into passive then the index buys. If you request money, the index sells. Passive investing means something, and what you are saying is not it. From William F. Sharpe, Nobel-winning economist who came up with capital asset pricing model (CAPM): > A passive investor always holds every security from the market, with each represented in the same manner as in the market. Thus if security X represents 3 per cent of the value of the securities in the market, a passive investor's portfolio will have 3 per cent of its value invested in X. Equivalently, a passive manager will hold the same percentage of the total outstanding amount of each security in the market[2]. * https://web.stanford.edu/~wfsharpe/art/active/active.htm https://web.stanford.edu/~wfsharpe/art/active/active.htm A "passive" investment strategy is not about not-buying/selling, but rather about not actively choosing particular financial instruments. > Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio.[1][2] Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds.[3] * https://en.wikipedia.org/wiki/Passive_management https://en.wikipedia.org/wiki/Passive_management Following a particular index (NASDAQ, Dow Jones, S&P 500, Russell 3000, Wilshire 5000, TSX, FTSE 100, MSCI EAFE) is passive investing, even if you put in money every pay cheque.

jleahy 4y ago
Technically speaking the Dow would not be a passive investment (by the definitions above), as it’s not market cap weighted.
- lupire 4y ago
  Does anyone invest in a DoW index fund?
  - yareally 4y ago
    Yeah, people buy shares of DIA all the time. It's a popular index fund. Not as liquid as spx/spy/qqq, but it's still up there
medvezhenok 4y ago
I think grandparent has a point - passive is a misnomer. Academic analyses of passive investing start right after the securities have been acquired and before they’re sold, which pretends that passive flows have no effect on the market (by definition - « always holding exactly 3% » implies no selling or buying, otherwise it is not possible) « Passive » funds do buy & sell based on flows and tracking of the index, not to mention when companies IPO and/or drop in/out of things like the S&P 500. Market weighted fund might be a better overall name than passive.
- throw0101a 4y ago
  I am aware of the terminology subtleties: > The terms passive investing and index investing are often intertwined, but they are not exactly the same thing. Today’s guest is Adriana Robertson, the Honourable Justice Frank Iacobucci Chair in Capital Markets Regulation and an associate professor of Law and Finance at the University of Toronto Faculty of Law and Rotman School of Management. Adriana is interested in index investing and, in this episode, we hear her views on whether or not index investing is passive. Hear facts from her paper on the S&P 500 Index fund specifically, and all of the reasons that it's not passive, as well as some of the issues that are potentially arising from the creation of so many indexes or so-called passive investments. A more recent paper by Adriana, published in The Journal of Finance, surveyed a representative sample of U.S. individual investors about how well leading academic theories describe their financial beliefs and decisions, and Adriana shares the differences in something like value growth from an academic perspective versus a real-world perspective. Find out how investors can go about evaluating the performance of their portfolios and what they should be looking for when deciding which index fund to invest in, as well as why index funds aren’t a meaningful category anyway, factors from Adriana’s surveys that might influence investor’s equity allocation, and the trend towards indexing and whether it will overtake active portfolios. Tune in today for all this and more! * https://rationalreminder.ca/podcast/133 https://rationalreminder.ca/podcast/133

jleahy 4y ago

Technically speaking the Dow would not be a passive investment (by the definitions above), as it’s not market cap weighted.

lupire 4y ago
Does anyone invest in a DoW index fund?
- yareally 4y ago
  Yeah, people buy shares of DIA all the time. It's a popular index fund. Not as liquid as spx/spy/qqq, but it's still up there

medvezhenok 4y ago

I think grandparent has a point - passive is a misnomer. Academic analyses of passive investing start right after the securities have been acquired and before they’re sold, which pretends that passive flows have no effect on the market (by definition - « always holding exactly 3% » implies no selling or buying, otherwise it is not possible) « Passive » funds do buy & sell based on flows and tracking of the index, not to mention when companies IPO and/or drop in/out of things like the S&P 500. Market weighted fund might be a better overall name than passive.

throw0101a 4y ago
I am aware of the terminology subtleties: > The terms passive investing and index investing are often intertwined, but they are not exactly the same thing. Today’s guest is Adriana Robertson, the Honourable Justice Frank Iacobucci Chair in Capital Markets Regulation and an associate professor of Law and Finance at the University of Toronto Faculty of Law and Rotman School of Management. Adriana is interested in index investing and, in this episode, we hear her views on whether or not index investing is passive. Hear facts from her paper on the S&P 500 Index fund specifically, and all of the reasons that it's not passive, as well as some of the issues that are potentially arising from the creation of so many indexes or so-called passive investments. A more recent paper by Adriana, published in The Journal of Finance, surveyed a representative sample of U.S. individual investors about how well leading academic theories describe their financial beliefs and decisions, and Adriana shares the differences in something like value growth from an academic perspective versus a real-world perspective. Find out how investors can go about evaluating the performance of their portfolios and what they should be looking for when deciding which index fund to invest in, as well as why index funds aren’t a meaningful category anyway, factors from Adriana’s surveys that might influence investor’s equity allocation, and the trend towards indexing and whether it will overtake active portfolios. Tune in today for all this and more! * https://rationalreminder.ca/podcast/133 https://rationalreminder.ca/podcast/133