The world of investing, like most financial industries, has scores of well established bench marks. These marks are commonly tied to various market indexes. Typically, people can judge the performance of their holdings based on the growth in relation to a given index. This provides investors an effective tool to help manage their portfolios. However, there is a sharp disagreement on the best way this tool should be used.

There are two major schools of thought in relation to the use of benchmarks. The first group believes that investments should be managed in such a way as to surpass a given index level. This is accomplished through a technique called active investing. An individual (or fund manager) who uses this method will keep a close eye on the stocks within his holdings. Stocks will be bought and sold within the portfolio based on price movements and other market factors. It is not uncommon for active investors to adjust their holdings on a very regular basis. The second group believes that investments should not be aimed at beating an index, but rather they should be created to match the benchmark. This technique calls for people to create holdings that mirror a particular index. For example, an individual might choose to duplicate the earnings of the S&P 500. (one of the bigger index funds on the market) His goal would be to match the earnings of the fund by purchasing the same stocks as the S&P, in the same percentages.

The advantage of active investing is the potential for high growth. It is important to note that they key word is "potential". There is no guarantee that this will happen, and in most cases it does not. The fact is that most funds which are actively traded do not perform as well as their passively traded (also known as index funds) counterparts. Additionally, there are a couple of other disadvantages associated with active investing. First, taxes become an issue due to the fact that stocks are frequently bought and sold. Each time a stock is sold for a profit, the money is accessed a short term capital gains tax. Secondly, if an individual hires a professional fund manager, they will generally have to pay higher fees than they would if they chose an index fund.