What approach does a passive investment strategy take?

A passive investment strategy is characterized by its goal of replicating the performance of a specific market index rather than attempting to outperform it through active stock selection or frequent trading. This strategy often involves investing in a broad range of securities that comprise a chosen index, such as the S&P 500, thereby mirroring its composition and overall performance. The rationale behind this approach is grounded in the efficient market hypothesis, which suggests that it is challenging to consistently outperform the market due to the availability of information and the speed at which it is incorporated into stock prices.

In contrast to active strategies that engage in frequent buying and selling based on market conditions or individual stock performance, a passive strategy typically involves a buy-and-hold approach with minimal adjustments. This focus on replicating market index returns allows investors to benefit from the general growth of the market over time while often incurring lower transaction costs and management fees than actively managed funds. This makes passive investing a popular choice for many investors seeking long-term growth with a lower risk profile associated with trying to time the market or pick winning stocks.