Is investment through passive management funds or financial products an investment option?

Many times we have heard of people, companies, institutional investors who have become rich or have generated extraordinary returns in a short time, investing their money through the Financial Markets. How true can that be?

It’s definitely somewhat true, but it has its nuances. It is surely a minimum percentage in relation to the rest of the investments in the system. This could happen in two ways, either an investor with great skill, knowledge of the market and a bit of luck, anticipates and forecasts its evolution or knows privileged information that other investors do not, and anticipates executing their investments generating profit. to the detriment of others.

But, what would happen if the entire market (all investors) acted in exactly the same way when executing their investments? Can there be only winners in the game?

Probably not, since, although the stock market is not a game of chance, its operation and dynamism is centrally based on the expectations that its investors have about the prices of the financial assets that are part of said market and, for this , the financial analysis component (whether fundamental or technical) is the cornerstone that allows them to forecast the evolution of the price of said financial assets. Depending on their price expectation, investors carry out their work with the faithful conviction of: “buy low and sell high” or “sell high and buy low (in the case of short sales).

So, according to what has been said, if everyone had exactly the same expectations, surely opportunities to have an opposite perspective on the evolution of the price of a certain financial asset could not be generated and, surely, those opportunities to generate extraordinary returns would be lost. Extraordinary returns that for someone also become extraordinary losses.

But, what happens if there are investors who do not have much knowledge of the market or who simply do not have the time to do in-depth market analysis? Are they investors who are doomed to not be able to invest through the financial markets?

The truth is that no and for this the market itself has created investment mechanisms through structures known as passive management investment, which are nothing more than investment funds or financial products that faithfully follow the evolution of the market. That is, they do what most investors conceive and, therefore, get the same results. Which means that, if the market was in a bullish period, returns are generated and that, if the market had a period of falls, the investor generates losses equal to or very similar to those that the entire market generated.

In short, it is a valid investment mechanism, current and widely used by investors from all over the world, especially those with a conservative profile and who prefer to save the costs of financial advice for making investment decisions through financial markets. . Through these mechanisms there is no way to beat the market and generate financial returns outside of the market’s own evolution.

By Christian Crespo S., Legal Director, PICAVAL