As opposed to this passive style of investing, actively managed investments are those investments in which the trading manager is buying and selling stocks, bonds, futures, options, derivatives, or any combination thereof, with the expressed intent of generating net profits for the investor. Almost all investments other than index mutual funds are actively managed investments.
Indexed investments have two key advantages over actively managed investments.
The first advantage of index investing is that the frictional costs are extremely low. Frictional costs are the total costs of trading, whether that trading method is passive or active. Frictional costs include commissions, loads, bid-offer slippage, and other fees paid by the investor. Secondly, the track record of investing in U.S. stocks is very long and therefore highly reliable over the long term. Over the past ninety years the U.S. stock market has returned a yearly average of approximately 11.5 percent to the investor, including dividends.