Date: 31st August 2017
Traditionally, the dichotomy of investment models consists of active investing and passive investing, also known as indexing. To these two, financial researchers are striving to add a new category, which is commonly referred to as evidence-based investing.
In the active investment sector, brokers and fund managers try to outperform the reported performances of indexes (simply, ‘to beat the market’) with financial placements that will generate a return higher than others did in the past. Consequently, active investing is uncertain, since it is based on personal predictions concerning the evolution of the demand and supply on the market, and thus subject to a higher risk of default.
On the other side, passive investment is safer since it follows the trodden path of stock transactions (indexes). Fund managers declare that they will seek to benchmark the fund (simply, to make placements that fit within the reported limits of the indexes), or some misleadingly declare that they will engage in active investing, without actually doing so, merely clinging to an index (a practice that is also called closet indexing, see BETTER FINANCE’s project here). This means that the investments’ evolution in time either (i) coincides with the index or either (ii) reports a very small, insignificant out- or under-performance of the given index.