I’ve long complained about the term “passive investing.” Many people like to say that investing in indexes is passive investing. That’s not the case by a long shot. For one thing, the indexes are constructed by people making choices, and the indexes regularly are changed. Indexes aren’t passive. They aren’t “the market.” This article goes further, and says there are at least five decisions that every index investors has to make that aren’t passive.
However, I would extend the argument in a fashion that softens that criticism: When it comes to portfolio formation, as opposed to security selection, everybody is active. There are no saints among us. Every portfolio reflects a situation and viewpoint. There is no natural landing point, shared by all who are purely passive.
Well, there is one portfolio, but it can’t be achieved. That is the collection of assets that forms the globe’s entire wealth. All stock markets, all fixed-income securities, all private companies, all real estate, all commodities, all collectibles … anything that carries value. Somebody who holds a proportionate sliver of that agglomeration, which I will term the “Global Wealth Index” (GWI), is indeed passive.
Nobody does, of course, nor is likely to for a long time (if ever).