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Chapter 12. Managing Your Investments > Passive Management Versus Active Manage...

Passive Management Versus Active Management

Our discussion point here is the manner in which you invest your money. There is a wide variety of strategies that professionals and do-it-yourselfers use, and they fall into two broad categories: passive management and active management. Understanding these two options is very easy and worthwhile.

The philosophy of passive management is that you put money away in indexed investments. Other than adjusting for changes in your asset allocations based on lifestyle changes or life events, you pretty much leave things alone. Those who endorse passive investing point to much lower costs because you're not actively trading and also point out that passive management has significantly outperformed active management, partly because of those lower costs. For example, a 1996 study by Vanguard looked at a 10-year period ending December 31, 1996. In that study, Vanguard found that out of 273 growth and value funds, only 14 percent beat the compound return on the S&P 500 Index. In other words, only 14 funds beat the average by more than 2 percent while 147 underperformed by 2 percent.


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