Basic Financial Concepts
By Timothy J. McIntosh; CFP™ MBA MPH CMP [hon]
By Jeffery S. Coons; PhD CFA
By Dr. David E. Marcinko; MBA CMP™
Passive investing is a monetary plan in which an investor invests in accordance with a pre-determined strategy that doesn’t necessitate any forecasting of the economy or an individual company’s prospects.
Premise
The primary premise is to minimize investing fees and to avoid the unpleasant consequences of failing to correctly predict the future. The most accepted method to invest passively is to mimic the performance of a particular index. Investors typically do this today by purchasing one or more ‘index funds’. By tracking an index, an investor will achieve solid diversification with low expenses. Thus, a physician-investor could potentially earn a higher rate of return than an investor paying higher management fees.
Passive management is most widespread in the stock markets. But; with the explosion of exchange traded funds on the major exchanges, index investing has become more popular in other categories of investing. There are now literally hundreds of different index funds.
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[Domestic Bull Markets – Historical USA]
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Passive management is based upon the Efficient Market Hypothesis theory. The Efficient Market Hypothesis (EMH) states that securities are fairly priced based on information regarding their underlying cash flows and that investors should not anticipate to consistently out-perform the market over the long-term.
The Efficient Market Hypothesis evolved in the 1960s from the Ph.D. dissertation of Eugene Fama. Fama persuasively made the case that in an active market that includes many well-informed and intelligent investors, securities will be appropriately priced and reflect all available information. If a market is efficient [even emerging and/or world markets], no information or analysis can be expected to result in outperformance of an appropriate benchmark.
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[USA versus World Index]
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More:
- The Active v. Passive Investing Dichotomy
- The “Life Cycle Investment Hypothesis”
- Is Passive Investing Right for You?
- Are Capital Markets Efficient?
- Enter the CMPs
- Sample iMBA Engagements
- Foreword Dyken MD MBA
The Author
Timothy J. McIntosh is Chief Investment Officer and founder of SIPCO. As chairman of the firm’s investment committee, he oversees all aspects of major client accounts and serves as lead portfolio manager for the firm’s equity and bond portfolios. Mr. McIntosh was a Professor of Finance at Eckerd College from 1998 to 2008. He is the author of The Bear Market Survival Guide and the The Sector Strategist. He is featured in publications like the Wall Street Journal, New York Times, USA Today, Investment Advisor, Fortune, MD News, Tampa Doctor’s Life, and The St. Petersburg Times. He has been recognized as a Five Star Wealth Manager in Texas Monthly magazine; and continuously named as Medical Economics’ “Best Financial Advisors for Physicians since 2004. And, he is a contributor to SeekingAlpha.com., a premier website of investment opinion. Mr. McIntosh earned a Bachelor of Science Degree in Economics from Florida State University; Master of Business Administration (M.B.A) degree from the University of Sarasota; Master of Public Health Degree (M.P.H) from the University of South Florida and is a CERTIFIED FINANCIAL PLANNER® practitioner. His previous experience includes employment with Blue Cross/Blue Shield of Florida, Enterprise Leasing Company, and the United States Army Military Intelligence.
Conclusion
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