Passive investing is the cornerstone of Cardiff Park’s philosophy. It is a financial strategy that attempts to match, rather than beat, the performance of the market. Within the equity portfolio, passive managers start with the entire universe of stocks that are eligible to trade and then they sort them along large and small cap, and value and growth fundamentals. They don’t waste their time on forecasting, market timing or economic predictions to guide investment decisions. A passive manager seeking to capture the returns of U.S. stocks makes no determination if Coke is preferable to Pepsi, if Microsoft is preferable to Google, or if the economy is expanding or contracting. Instead passive managers hold that markets are efficient (i.e. they quickly adjust to new information) and that prices are fair.
Passive investment advisors build portfolios based on proven principles of asset allocation, using low-cost index funds. Index funds offer the advantages of low operating and trading expenses, excellent diversification within asset categories, and broad access to all segments of the market.
Index fund managers construct their portfolios to closely approximate the performance of well recognized market benchmarks. They buy and hold stocks in the same proportions as they exist in the market or some sub-category of it, e.g. the S&P 500 index (large U.S. companies), the Russell 2000 Index (small U.S. companies) or the Morgan Stanley “EAFE” index (large international companies) resulting in a portfolio with hundreds or even thousands of stocks. Other well-known indexes measure small company stocks, high-book-to-market company (value) stocks, emerging market stocks, foreign stocks, real estate securities, precious metals, gold, commodities and an array of taxable and tax-exempt fixed income strategies.
The decision for a passive investment adviser becomes how much stock to hold versus bonds, and how small, large, value, or tilted towards growth the stocks should be. Passive investing when applied to an investor’s portfolio means investing in a mix of asset classes, via passive strategies, that capture broad market exposure and control risk.