Which should it be — passive or active management of your investments? For many smaller investors this translates into which type of mutual fund should they have.The philosophical arguments have been ongoing for years. If you read about the gurus of investing, each of them has their preferences.John Bogle, the founder of Vanguard Investments, is a passionate advocate of the investment strategy called passive investing which is described by www.answers.com as a strategy involving limited ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance.

Other web-sites, such as Investopedia use different descriptions such as buy-and-hold or couch potato strategy, passive investing requires good initial research, patience and a well-diversified portfolio.

Unlike active investors, passive investors buy a security, an index, or an exchange-traded fund and typically don't actively attempt to profit from short-term price fluctuations. Instead, they rely on their belief that in the long term the investment will be profitable.

How does an index fund work? Stock index funds, for instance, walk in step so to speak with the index (S&P) benchmark that they try to match. The fund will emulate the same representative weighted amounts of each stock in the index, rather than paying a management team to actively try to out manoeuvre individual stocks, sectors, or other investment strategies. Index funds do not even attempt to beat the equities market, they simply seek to come as close as possible to equalling it.

Couch potatoes do a lot of thinking. My favourite index fund approach is the Couch Potato Approach originally developed by Scott Burns, a personal-finance writer for the Dallas Morning News. The original strategy involved investing half of the investor's assets in an S&P 500 Index fund and half in a fund mirroring the Shearson/Lehman Intermediate Bond Index. (Burns used the Vanguard 500 Index and the Vanguard Total Bond Fund Index.)

Fees count. Passive investment index funds are extremely economical to own, for several reasons: you don't incur large trading commissions, because you are into buying and holding; you don't actually own the underlying securities which also keeps costs down, and you aren't paying an investment management team to actively manage an index say for outperformance — or alpha as is it known in the industry.

While it may be a chore to research, if you are considering purchasing an individual index mutual fund for price comparison, watch for additional management fee layers on a mutual fund that is only a passive index. The question that always be asked is, why pay extra for passive management. It pays to compare index funds fees closely, for this reason.

Emotionally, owning any passive investment is another story. We are human beings, complex, full of emotions, doubts, at times brimming with confidence in our knowledge while in other circumstances, questioning our own logic. We are not computer-generated passive investors. When markets are folding down on a consistent long-term basis, will you have the tenacity to ignore those losses with the understanding according to every investment guru has said that eventually, the index will recover? That's a tough one.

It has taken the S&P benchmark six long years to reach the pre-2000 Bear Market highs. The Nasdaq index has yet to recover (see the charts).

So, while intuitive long-term investor such as Warren Buffet have done very well with buy and hold, he also has billions in a buffer to wait it out. It just may not work for you.

What are the alternatives?

Taking matters into your own hands, there is a very innovative website geared to help you learn more about investments. You, along with 55,000 other people, become a virtual portfolio manager with the responsibility of appreciation 1 million dollars in virtual money. You are supplied with many trading technology tools and research.

The site www.marketocracy.com actually tracks your activity, and uses your investment successes to build on their own group of mutual funds.

Everyone benefits, and you can practice for free. If it turns out that you have a flair for this business, you may be rewarded by the owners, exactly how, was not quite clear.

Manage your own mutual fund. Read what they have to say on their web-site: "Marketocracy's mission is to find investment talent wherever it may be, by identifying people with first-hand industry experience and proven investment strategies. We're doing the best search humanly possible to find the most talented portfolio managers in the world, with the goal of putting their talent to work to manage your money."

Marketocracy lets you manage a virtual portfolio of $1m in a simulated trading environment, allowing you to track your performance accurately and compare your fund management skills to other investors and professional fund managers. If your track record turns out to be one of the best, you could be hired to help manage a real fund at Marketocracy. It's a great place to learn, and a great place to prove your talent."

They also offer a Premium package, somewhat pricey, that gives you access to more tools, a member portfolio management group discussion forum, and other perks.

Additionally, they advertise their proprietary mutual funds that they feel outperform due to the efforts of their 55,000 individuals that are using their free proprietary tools and technology.

An interesting site, and a concept that I have never seen before. It's too early for me to qualify one way or another, but you can be sure that I will be tracking the activity for a while.

Martha Harris Myron CPA CFP|0xae| is a dual citizen (Bermudian/US). She is a Senior Wealth Manager at Argus Financial Limited specializing in wealth investment advisory services for capital preservation and comprehensive financial solutions for clients considering lifestyle transitions and rewarding retirements. Confidential email can be directed to marthamyron@northrock.bm or 294-5709

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