5 Best Passive Investing Options for Income

“Concentration Risk: Most indexes used for passive investing are weighted by market capitalization, meaning larger companies make up a larger portion of the index. This can lead to overexposure to certain sectors or companies. The S&P 500 is a particularly egregious example. Recently, we calculated that just 7 stocks made up 27.5% of the index. Index Tracking Error: Because of the way indices are calculated, it’s not possible to perfectly replicate index performance. It’s almost impossible for individual investors to closely replicate index performance in their own portfolios without using a fund. No Downside Protection: Passive investing is subject to full market swings. In a bear market, passive portfolios suffer the full brunt of any losses. By contrast, active investors may choose to hold safer assets during market volatility. Over-reliance on Past Performance: Passive investing is built on the assumption that markets will continue to perform in the future as they have in the past. I’ve personally examined a ton of different prebuilt models, and very few of them look back before the year 2001. This is a major oversight! First of all, the 2000-2001 bear market was severe and shouldn’t be ignored just because backtested models don’t handle it well. Secondly, investing involves some very long-term trends and the market tomorrow may resemble the market decades ago.”