Getty Images Many people wonder whether they should choose passive or active funds for their portfolio. To me, passive investing is the only sensible way to invest. The data strongly points to higher risk-adjusted returns for passive portfolios. Passive portfolios also have a variety of other advantages that will become even more pronounced once my retirement years roll around, which is precisely the time when I need my money to work for me the most. Here are a few reasons passive investing works incredibly well in retirement: Passive portfolios take less time to manage, so there's more time to have fun. You may be motivated enough to pore through pages and pages of information about active mutual funds to find those able to outperform the market, but do you really want to do that over and over again in retirement? And that's assuming you are lucky enough to have the knowledge and skill to find the gems in the first place. How much time do you plan to devote to the act of investing? Passive portfolios take almost no time to manage. Set them up, rebalance back to the predetermined asset allocation periodically and you are pretty much done. With the extra time on your hands, you can spend more time having fun. There are fewer ways to make mistakes. The beauty of a basket of index funds that's held through thick or thin is that you don't need to constantly make investment decisions that could make or break your portfolio performance. Even a mathematical wonder who seldom makes mistakes could experience cognitive decline as he advances in years. The emotional toll of investing in equities is less taxing. Market valuations decline all the time, and it can be just as gut wrenching to see a passive portfolio balance shrink as an active one. The difference, however, is a passive portfolio's valuation is more likely to come back up. This is because passive investing is based on the total market. By hanging on and not selling, you are indirectly making a bet that the U.S. and global economies are going to continue to grow through time –- an extremely likely event unless the world is ending. Active investing, on the other hand, is a bet that a select few investments you own are going to continue to grow through time. Sometimes this works out, but as people who owned tech stocks during the dot-com bubble learned, sometimes you can lose a lot.
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