Ever since investing legend John Bogle essentially invented passive investing it hass taken off like a rocket. Basically, passive investing is putting your money into index funds, which track an entire market or sector.
According to Bloomberg, in terms of equity funds, passive funds overtook actively managed funds in 2018. This was largely driven by funds that track the S&P 500, the total U.S. stock market and other broad indexes. Passive funds now hold nearly 54% of all assets under management in U.S. equity funds.
But here lies a huge opportunity in selecting some quality stock that are totally under-valued due to passive fund selling. This is how it works:
When you invest your money in a passive fund, you’re buying the entire market because you want your allocation to mirror, the S&P 500 for example. Yet when investors sell these funds in market downturns, passive fund managers sell off all the companies in the fund. They unload shares indiscriminately, paring positions in great companies along with those that are, less great. This creates massive value opportunities for the smart investors. Because suddenly the shares of good companies are on sale, having been dragged down by passive fund selling, for no other reasons than passive investors liquidating their investment.
In this market environment, when panic sets in and investors simply try to get out of the market because they get scared, fundamentals are not reflected in share prices as they may should. That creates excellent opportunities. Opportunities to pick up great companies that are suddenly trading at lower valuations.
With the markets having entered bear market status, literally everything is on sale, both good companies and less attractive ones, also thanks to simple passive index tracking investment.
So check out the good quality stocks with value and excellent fundamentals. they are currently out there. Keep your eyes open and invest wisely.
Sven Franssen