Is Passive Investing the Road to Wealth?

I'm one of those who has looked at the record and decided that active mutual fund managers cannot – on a consistent basis – outperform the market averages.  Obviously there are always going to be a few exceptions, but it's impossible to know – in advance – which funds to buy.  There are always some big winners and losers.

To me the obvious conclusion for the mutual fund investor is to skip the payment of large expenses and management fees and invest in index funds, or the some of the ETFs with very low management fees.  Just saving that one to two percent management fee, along with trading expenses, puts the investor ahead of the game.

But not everyone wants to own funds.

The evidence is also clear that the vast majority of individual investors who choose their own stocks cannot do any better than the professionals, and also under-perform the stock market averages.

That's one of the reasons you are visiting this, and other blogs that are devoted to options education.  Conservative option strategies and prudent risk management increase your chances of being a successful investor.

But what about passive investors?  Must they just take their chances and hope the markets rise steadily over time, or can they also take advantage of options? 

Options work nicely for passive investors. When they own optionable exchange traded funds (ETFs), passive investors can adopt conservative strategies, and in exchange for limiting profits when the market soars, use collars to protect the value of their stock market portfolios.  Imagine the benefits for passive investors.  They usually are content to accept average returns over the long run.  Options provide a much better chance for those investors to outperform most mutual funds – and they get the advantages of owning portfolios that are protected from incurring a huge decrease in value.

What puzzles me is that I have not found any financial writers, bloggers, or professional advisors who recommend using options together with passive investing.  Passive investors are merely one additional group of investors who are missing out on the benefits of investing conservatively with options.

Follow me on twitter.

340

No comments yet.

Please share your thoughts.