passive management

Passive management is a method of investing whereby a fund's portfolio is mirrored by a market index. It is considered a cautious, strategic approach to investing, in which a fund manager actively strives to make as few decisions as possible so as to minimize transaction costs. Passive management is based upon the efficient market hypothesis, which stipulates that markets in and of themselves are better conveyors of market performance than individual stocks are. Proponents of passive management are far more likely to invest in index funds, rather than in individual stocks. The belief is that the passive management approach will benefit long-range investors by not burdening them with numerous transaction costs. Contrary to this, proponents of active management believe that the better approach to market investment is to actively pursue and invest in the top performing stocks. Most investment firms prefer passive management to active management.

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