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The ETF Book: All You Need to Know About Exchange-Traded Funds, Updated Edition by Richard A. Ferri

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CHAPTER 17

Passive ETF Portfolios

Passive investing is a simple and effective portfolio management technique. It is also difficult to maintain because the strategy requires strict discipline. To be a successful passive investor, you need to have an unwavering belief that the strategy will work in the long term.

Passive investing is all about holding a portfolio of exchange-traded funds (ETFs) that mostly follow low-cost benchmark indexes. The portfolio is designed on the basis of an investor’s long-term goals, and the investments are held for a very long time. Passive investors do not attempt to time markets by forecasting economic changes or charting prices. Nor do they attempt to rotate among market sectors or styles in search of superior returns. The only trading done in the portfolio is when asset class rebalancing is needed or when cash is added or withdrawn.

The objective of passive management is to achieve the return of the markets. Successful passive investors realize that natural returns of the global stock and bond markets are worthy returns. They also understand how difficult it is to beat the markets and that few people actually accomplish that feat during their lifetime.

Unfortunately, passive investing typically starts with good intentions but does not always end that way. Maintaining a set allocation for many years requires conviction and emotional discipline. Many would-be successful passive investors sway from their convictions at some point because they think ...

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