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A Perspective on the Attraction of Passive Investing

Behavioral studies over the years¬†have shown that people generally have a greater aversion to loss than an interest in gains. A recent survey of global investors by Natixis bore this out again as 79% of investors surveyed said they’d take safety over investment performance.

When put in context with the following findings on index funds from the same study, this penchant for minimizing losses helps explain the persistent preference for passive investing. Among global investors:

1. 60% believe index funds are less risky

2. 60% believe index funds can help them minimize losses

3. 61% believe index funds offer better diversification

It appears that most people don’t see active investing as a way to manage risk and believe that if they are going to be in the equity market, they will be best protected in passive products. In the mind of the public, the theory that active investors cannot over time beat the market has been expanded to include active investors’ inability to improve on the market’s risk profile as well.

Add to this the additional findings that among global investors:

1. 62% believe index funds have lower fees

2. 55% say index funds help them access the best investment opportunities

And you have the trifecta. For most investors, index funds come out winning on cost, performance and risk management.

It’s not so surprising that investors see index funds as they do. While there are many investor communications touting MPT and the rationale for index investing with regard to pricing and performance, few discuss the issue of risk. This lack of comment appears to have left many readers with the impression that active managers cannot “outperform” on risk either.