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Disclaimer
Ostrich Approach To Investing A Bird-Brained Idea
Of the different investment strategies and behaviors that an investor or fund manager can adopt, some notable ones include active investing , passive investing and the ostrich effect.
• Active investing involves the constant buying and selling of securities in order to profit from short-term changes in the stock market. This strategy is often very beneficial when the market is doing particularly well.
• Passive investing is just the opposite of active investing: it employs a buy-and-hold strategy to profit from long-term trends in the stock market and is used by investors who want to avoid risks.
• Both active and passive investors may exhibit the ostrich effect, or a tendency to ignore bad news in the market.
While there are similarities between passive investing and the ostrich effect, such as the risk-averse nature of the investors who practice them, there are also major differences. These differences, and the dangers of ignoring market news, will be explored here.
What Is Passive Investing?
Passive investing is a long-term strategy that involves restricted buying and selling of securities. A passive investor buys securities in order to hold them for a long period of time, because he or she believes that stocks will go up in the long run.
An investor who invests passively does not seek to beat the market; he or she just wants to match the markets returns. In order to accomplish this, passive investors often invest in index funds and exchange-traded funds (ETF) that mirror market indexes. This is why passive investing is sometimes referred to as index investing. (Get to know the most important market indexes and the pros and cons of investing in them in Index Investing.)
Advantages of Passive Investing
Some advantages of passive investing include the following:
• Lower costs and higher profits: Investing in index funds usually incurs lower management fees, because a passively traded portfolio requires fewer resources and less time to manage than an actively traded portfolio. If an actively traded portfolio yields the same returns as a passively traded portfolio, the passive investor is going to receive a higher return, because when investors sell a security, the amount of profit they receive is equal to the sell price less the buy price, minus management fees and trading commissions. (Learn how you can save on fees and commissions in Settling Wrap Fees.)
• Automatic gains from market upswings: Since passive portfolios are constructed to closely follow the performance of market benchmarks like the S
