Active vs. Passive Investing Understanding the Differences It's easy to get caught up in the Wall Street hype about which investment approach is better. Proponents of each believe their approach is the right one, the one that has the potential to generate the greatest amount of return over the long term. Active vs. Passive: The Basics Active management is simply an attempt to "beat" the market as measured by a particular benchmark or index. The S&P 500 Index and the Russell 1000® Index are examples of two indexes that gauge the performance of the large-cap U.S. stock market — the so-called "blue chip" stocks. Prevailing market trends, the economy, political and other current events, and company-specific factors (such as earnings growth) all affect an active manager's decisions. The aim of active fund management — after fees are paid — is to outperform the index for a particular fund (not to mention other fund managers they may be competing against). Passive management is more commonly called indexing. Indexing is an investment management approach based on investing in exactly the same securities, in the same proportions, as an index. The management style is considered passive because portfolio managers don't make decisions about which securities to buy and sell; they simply copy the index by purchasing the same securities included in a particular stock or bond market index. Which Approach Works Best? That's a never-ending debate. Hard facts aside, active and passive management are in many ways similar to political parties. The two camps see the investment world in very different ways, both making logical and passionate arguments for their viewpoint. Passive managers generally believe that it is difficult to beat the market. Therefore, they essentially offer asset class performance that closely matches an index for those investors who are unwilling to assume the risks of active management. Active managers believe the market can be beaten. While they can't beat it all the time, many active managers do believe there are certain irregularities in the market that can be taken into consideration to achieve potentially higher returns. Active Management Advantages   Expert analysis — Seasoned money managers make informed decisions based on experience, judgement, and prevailing market trends. Possibility of higher-than-index returns — Managers aim to beat the performance of the index. Defensive measures — Managers can make changes if they believe the market may take a downturn. Active Management Disadvantages   Higher fees and operating expenses. Mistakes may happen — There is always the risk that managers may make unwise choices on behalf of investors, which could reduce returns. Style issues may interfere with performance — At any given time, a manager's style may be in or out of favor with the market, which could reduce returns. Passive Management Advantages   Low operating expenses. No action required — There is no decision-making required by the manager or the investor. Passive Management Disadvantages   Performance dictated by index — Investors must be satisfied with market returns because that is the best any index fund can do. Lack of control — Managers cannot take action. Index fund managers are usually prohibited from using defensive measures, such as moving out of stocks, if the manager thinks stock prices are going to decline. Taking a Long-Term View Wall Street will continue to debate the benefits of active versus passive investment management. And from time to time, one approach will be more popular than the other. As an individual investor, try to ignore the trend of the moment. When all is said and done, keep in mind that both active and passive managers are selecting investments from the same pool of equities. Fund objectives, risks, charges, and expenses should be carefully considered before investing. A prospectus containing this and other important information can be obtained by calling (866) 676-7680 or by visiting this page on russell.com. Please read the prospectus carefully before investing. Copyright© Russell Investment Group 2005. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investment Group. It is delivered on an as is basis without warranty. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide and is a subsidiary of The Northwestern Mutual Life Insurance Company. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Indexes and/or benchmarks are unmanaged and are provided for general comparison purposes only. They cannot be invested in directly. S&P 500 Index: An index, with dividends reinvested, of 500 issues representative of leading companies in the U.S. large cap securities market (representative sample of leading companies in leading industries). Standard & Poor's Corporation is the owner of the trademarks, service marks, and copyrights related to its indexes. The index is unmanaged and cannot be invested in directly. Russell 1000® Index: Measures the performance of the 1,000 largest companies in the Russell 3000® Index, representative of the U.S. large capitalization securities market. Securities products and services offered through Russell Financial Services, Inc. (formerly Russell Fund Distributors, Inc.), member FINRA, part of Russell Investments. For information on the Financial Industry Regulatory Authority, go to www.finra.org. RFD 05-5604. First used: November 2005.			RELATED Articles Developing Your Investment Strategy Sticking with Your Strategy Using Diversification to Combat Risk   Investment PRODUCTS Russell Funds LifePoints Funds Separate Accounts Institutional Funds   Printer friendly version of this page Send feedback or comments Site Search

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