Why passive strategies are preferrable to ppl who are taxable? I must have missed something when I am reading Schweser…
Because you don’t get taxed until gains or losses are realized. You can hold a passive portfolio for years (which is not the case for an active portfolio) deferring taxes.
Right. To expand on maratikus, the typical tunover in a index fund is maybe 7% (if large cap) while the average turnover for a active large cap fund might be 100%. When the market is going up (remember those days), that turnover FORCES the end investor to realize captial gains. With a passive fund the end investor has more choice over when to realize taxes.
Much better explanation, mwvt!
Well, so this is under the assumption that you use the conventional style to buy and hold the index? While Active strategy “usually” involves short term trading? Thanks guys. I buy that. Active --> more trading; passive --> do nothing.
That is correct lxwqh, by defintion a passive strategy has very little trading. You are trying to replicate some benchmark (usually).
Good explanation. You don’t pay capital gains, or at least nut much.
only potential liquidations are usually for rebalancing and preventing drift with index funds, whereas active management is based on find market inefficiencies (alpha) and exploiting them, which tends to be much shorter term.