{"id":2899,"date":"2012-09-11T09:00:11","date_gmt":"2012-09-11T16:00:11","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=2899"},"modified":"2016-12-21T07:36:59","modified_gmt":"2016-12-21T15:36:59","slug":"passive-investment-portfolio-basics-3-questions","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/passive-investment-portfolio-basics-3-questions\/","title":{"rendered":"Passive Investment Portfolio Basics: 3 Questions"},"content":{"rendered":"<p>Building an effective passive investment portfolio is a mind game, much more so than you might think.<\/p>\n<p>Consider these three simple questions:\u00a0What do you believe about investing?<\/p>\n<ul>\n<li>That, over time, stocks will outperform bonds?<\/li>\n<li>That long-term investing is better than short-term?<\/li>\n<li>That, as time passes, the impact from market headlines will diminish?<\/li>\n<\/ul>\n<p>If you agree with these ideas, you&#8217;re ahead of the game when it comes to building an effective passive investment portfolio. Your thoughts are already in line with most professional money managers, according to\u00a0<a title=\"Pensions &amp; Investments story on risk adjusted investing\" href=\"http:\/\/www.pionline.com\/article\/20120723\/PRINTSUB\/307239976\" target=\"_blank\">a survey conducted by\u00a0<em>Pensions &amp; Investments\u00a0<\/em>and Oxford University<\/a>.<\/p>\n<p><a href=\"http:\/\/www.flickr.com\/photos\/paxson_woelber\/5434541912\/sizes\/l\/in\/photostream\/\" target=\"_blank\"><img loading=\"lazy\" class=\"alignnone  wp-image-2920\" title=\"Image by Paxson Woelber\" src=\"https:\/\/www.marketriders.com\/investing\/wp-content\/uploads\/2012\/09\/risk.jpg\" alt=\"passive investment portfolio basics\" width=\"491\" height=\"369\" srcset=\"https:\/\/www.marketriders.com\/investing\/wp-content\/uploads\/2012\/09\/risk.jpg 1024w, https:\/\/www.marketriders.com\/investing\/wp-content\/uploads\/2012\/09\/risk-300x225.jpg 300w, https:\/\/www.marketriders.com\/investing\/wp-content\/uploads\/2012\/09\/risk-800x600.jpg 800w, https:\/\/www.marketriders.com\/investing\/wp-content\/uploads\/2012\/09\/risk-170x128.jpg 170w, https:\/\/www.marketriders.com\/investing\/wp-content\/uploads\/2012\/09\/risk-85x64.jpg 85w\" sizes=\"(max-width: 491px) 100vw, 491px\" \/><\/a><\/p>\n<p>Here&#8217;s another way you probably agree with the professionals: It&#8217;s far easier to pick assets than it is to understand the risks underlying them.<\/p>\n<p>In the study, about\u00a030% of respondents were neutral to the idea that &#8220;diversification across risk premiums, rather than across asset classes, generates superior risk-adjusted returns.\u201d Fifteen percent said they didn&#8217;t know.<\/p>\n<p>That means that close to half (45%) of professional money managers surveyed are unlikely to take the time to plumb the risk-reward relationship of a given investment strategy. It&#8217;s too much work.<\/p>\n<p>&#8220;Asset classes are easy to identify, you can tell debt from equity. But actually being able to identify one risk premium to the next is much more difficult. It&#8217;s definitely the more difficult route, but it&#8217;s also potentially more rewarding,\u201d Dane Rook, an Oxford researcher who studied the results, told<em> Pensions &amp; Investments<\/em>.<\/p>\n<p>Nevertheless, most who used them agreed that risk-based strategies worked: Fifty-two percent reported that the risk-adjusted approach met its expected return, and 38% reported outperformance.<\/p>\n<p>Consider the gap here: Forty-five percent believe that risk-adjusted investing is more trouble than its worth, yet most reported an expected or better-than-expected return from using it.<\/p>\n<p>The takeaway for your\u00a0passive investment portfolio is simple enough: In investing, you can trust a person, an institution, or a process. Only one can be tested with rigor.<\/p>\n<h2>Passive investment portfolio in action<\/h2>\n<p>Trusting a person can be very reassuring. Your investment advisor ends up being nearly family over the years. Nevertheless, if he or she truly has your back, you can bet that risk-adjusted, passive investing is a major part of the plan.<\/p>\n<p>If instead you trust an institution, say a big brokerage or bank, then you are one step removed from the people who make the decisions about your money. Advisors come and go with their pay and prestige.<\/p>\n<p>Finally, there&#8217;s process. Truly risk-adjusted investing is not that hard to do. It can be replicated with software and it is easy to follow and test. It&#8217;s cheap and it works. <a title=\"Take the MarketRiders tour\" href=\"http:\/\/www.marketriders.com\/tour\/diversify-your-money\" target=\"_blank\">You can learn passive investing in a weekend and put it into practice in a few hours<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Building an effective passive investment portfolio is a mind game, much more so than you might think. Consider these three simple questions:\u00a0What do you believe about investing? That, over time, &hellip; <a href=\"https:\/\/www.marketriders.com\/investing\/passive-investment-portfolio-basics-3-questions\/\">Read more <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":8,"featured_media":2920,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_rev_ctl_limit":""},"categories":[3],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v19.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Passive Investment Portfolio Basics: 3 Questions | MarketRiders.com<\/title>\n<meta name=\"description\" content=\"Passive investment portfolio basics are a mind game. Much more so than you might believe. 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