<p>Passive investing is a strategy that involves tracking a market index rather than actively picking stocks. It aims to replicate the performance of a specific market segment, such as the S&P 500, by investing in all or a representative sample of its constituents.</p>

<h2>How It Works</h2>
<p>Passive investing, also known as index investing, works by purchasing a basket of securities that mirror the composition of a specific market index. Here's how it typically works:</p>
<ul>
  <li>An index provider, like MSCI or FTSE, creates and maintains an index that represents a segment of the market, such as the U.S. stock market or global bonds.</li>
  <li>Investment funds, such as index funds or exchange-traded funds (ETFs), replicate the index's composition by purchasing the same securities in the same proportions.</li>
  <li>Investors buy shares in these funds to gain exposure to the market segment represented by the index.</li>
</ul>
<p>Passive investors typically hold these funds for the long term, rebalancing their portfolios periodically to maintain their desired asset allocation.</p>

<h2>Why It Matters</h2>
<p>Passive investing matters because it offers several advantages over active investing:</p>
<ul>
  <li><strong>Lower costs</strong>: Passive funds have lower expense ratios because they don't require the resources needed for active management.</li>
  <li><strong>Diversification</strong>: By tracking an index, passive investors gain instant diversification, reducing the risk of relying on a single stock or sector.</li>
  <li><strong>Historical outperformance</strong>: Over the long term, passive strategies have consistently outperformed actively managed funds. According to a study by S&P Dow Jones Indices, 89% of large-cap active funds underperformed their benchmarks over the past 15 years.</li>
</ul>
<p>For example, an investor seeking broad exposure to the U.S. stock market could simply buy an S&P 500 <a href="/NewSite/encyclopedia/index-fund/" class="ency-link">index fund</a>. This approach would provide instant diversification, low costs, and a high likelihood of matching or beating the market's performance over time.</p>