Passive investing is involves buying the whole market rather than picking individual stocks. Supporters of the approach argue that in aggregate over a long period of time the market is very good at determining share or asset prices and over a long period of time most asset classes increase in value proportionate to their risk.
Index Fund Passive Investing
Passive investing is not quite as passive as it first appears.
The S&P 500 index is the most widely used benchmark for large capitalisation US stocks, it covers around 80% of all US traded stocks by market capitalisation. The index of around 500 stocks was first compiled in March 1957, but only around 1/3 of those original companies still exist.
In other words if you had invested in 1957, only around 25% of your investment would still be in the same companies (and they would have probably changed their business models and market capitalisation a great deal). The other 75% would be in companies that did not even exist in 1957, in fact the majority of your investment would be in the worlds newest, fastest growing and innovative companies; think Google, Microsoft, Apple etc.
Proponents of the passive investing approach argue that the only way to get higher than average returns is to take higher than average risk.
‘No matter how skillful the trading scheme, over the long haul, abnormal returns are sustained only through abnormal exposure to risk’. Alan Greenspan