Index investment and active management: pros and contras
It is known that investment in tools with the fixed profitableness has predicted result. But it is impossible to tell it about shares. Strictly speaking, movements in the share markets carry, practically, unpredictable character. As in general it is possible to invest in these doubtful papers?!
It appears; that it is possible. Two groups of strategy are for this purpose used: index investment and active management.
Index investment (“buy and hold”) consists of two main actions: share portfolio purchasings in starting point and its sales in the final. The structure of assets in a portfolio will correspond to any known index. Therefore it is called — index investment.
However, it isn’t obligatory. The basic sign is absence of trading activity between a point of initial creation of a portfolio and a point of its liquidation. Though some trading activity can take place, for example, if new coming money or any part of assets arrives will be removed from a portfolio or in connection with change of structure of a reference index.
At use of such trading strategy the invested capital curve becomes close to a curve of a reference index. It is, of course, good in market growth as provides to the investor all profitableness of the market. But it is bad during the periods of falling of the markets — after all the investor receives all market risk. But the market risk practically is limited by nothing, therefore and index investment has unlimited risk. In adverse conditions it is possible to lose all invested capital!
Index investment becomes reasonable with occurrence in the share market of a global raising trend. That is when average price on the share gets higher from year to year. This phenomenon speaks about two factors: inflation and growth of an internal national produce (gross national product). After all, the share is, as a matter of fact, a part of any business having quite material basis. And inflation leads to rise in price of this material basis (machine tools, transport, structures and etc.). Gross national product growth leads to a profit accumulation in business-structures (in the form of money for the accounts, new productions and etc.) and they type weight.
But to use a global raising trend it is necessary to have, of course, time and money and both if these factors should not be limited. If money is in “short” (the investment horizon is limited by two-three years), that is real risk to remain not only without profit, but also with a decent loss.
Therefore, practically, the companies with “long” and “very long” money are engaged in index investment. These are pension funds, the insurance companies and etc. At private investors investment horizon is shorter. Therefore for them in index funds it is possible to recommend investments only for those periods when there is a high degree of probability of growth of the market.
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