Maybe Im overly purist, but just as you cant be a little bit pregnant, you cant be a partially passive investor. Owning a passive product does not a passive investor make.

Lets review. In a passive investing strategy, the investor purchases a fund designed to mimic an index and holds it, theoretically, forevercome hell or high water. Effectively, the school of thought advocating this approach presumes liquid markets (stocks, bonds, etc.) are simply too rational and efficient to beat over the long term. Hence, trying is fruitless. Investors are better off with a return only slightly behind an indexs long-term return.

So, advocates say, buy an index fund, set it and make like Rip van Winkle.

Passive investments are, of course, common. Such mutual funds and exchange-traded funds (ETFs, the vast majority of which invest passively) dot any list of the worlds most-owned fund investments. For this reason, folks seemingly presume passive investing is commonplace. Easy. Everyones doing it. Its in the pages of the financial press nearly daily. and its next to impossible to avoid a discussion in the personal finance section of your favorite news source.

Buying passive products is easy, of course. But so is selling them! So easy many investors cant help but do so. Simply buying a product that mirrors an index doesnt make an investor passivepassive investing is all about discipline. Extreme discipline requiring a coolly rational ability to properly define your goals. Then select an asset allocation likely to reach those goals. And the gumption to veer from this allocation only when life events or changing goals necessitate a long-term allocation change. That means never veering from the selected index fund out of fear or greed. Shifting at other points is an active choice. The number of investors who can successfully pull this off is miniscule. And failure at any of these steps may greatly hamper your ability to reach your financial goals.

The decision to use index funds comes only after youve decided on what type of index fund to seek. How you reach this decision is crucialfirst, you must successfully and clearly identify your goals and objectives. Then select a mix of stocks, bonds and other investments likely to reach those goals. Thats true of both passive and active investingand this decision accounts for many investor failures. Numerous studies have found this single decision determines the majority of an investors returnand index funds offer no help here.

Moreover, many folks who claim passivity buy multiple fundsseeking to fill out what the industry calls a style box (example here) or other mechanical means of diversifying. But this further reduces the impact of indexing. The asset and sub-asset allocation decisions are being made by a potentially inefficient meansthe investor choosing. (Thats an active decision if youre keeping score.)

But lets assume for a second you correctly allocate. And you mirror only stock or stock and bond indexes. Youre still not out of the woods. Above all, the biggest problem with passivity is the sheer emotional challenge. Most folks are insufficiently robotic to successfully weather all the market can throw at them. In his book, The Informed Investor, Frank Armstrong III documents a speech given by former Fidelity Magellan fund manager Peter Lynch, in which Lynch reportedly noted Magellans shareholders failed to achieve anything resembling the funds returns. Why? Constant emotion-driven flipping in and out. DALBAR, a market research firm, has documented much the same phenomenon for years in its Quantitative Analysis of Investor Behavior. This years DALBAR report showed average holding periods for fund investors were just 3.3 yearsa piece of a piece of a market cycle (about half an average-length bull market). DALBAR states this isnt long enough to allow investors to reap markets benefits. These issues arent limited to actively managed fund investors. To believe otherwise presumes passive investors have found the evolutionary on/off switch and toggled it sufficiently to mute emotional reactions to gain and loss. Seems a bit of a stretch.

And you shouldnt allow hindsight bias to whitewash your actual thoughts. Want to truly test whether you can handle passive investing? Actively record your thoughts on markets day by day for years. In the end, youll have a sufficiently long time period to reflect on. Would you have abandoned a broad-based index fund in favor of dotcoms during 1999, when the Nasdaq outperformed the S&P 500 by 64 percentage points? i Would you have liquidated at some point during 2008-2009s financial panic, when stocks had fallen roughly 60% from their peak? Would you have added in Emerging Markets holdings after their markets surged in the 2000s bull market? To successfully achieve the theoretical benefits of passive investing, you cant make such calls and changes. Theyre active decisions. (And if you have the stomach to actually stay cool through such wild periods in markets, you can probably do better in the long run applying that steely will in an active approach.)

Even some of passive investings best known proponents seemingly struggle. In a recent article published in The Wall Street Journal , Burton Malkiela strong advocate of index investing and author of A Random Walk Down Wall Street admitted roughly 10% of his portfolio is invested actively in individual stocks. For fun! Now, read this carefully and slowly: Investing a small portion of your assets speculatively for fun is a-ok with me, but should you do so, youre not being passive. Passive investing, again, is a discipline. Once that has broken, how long would it be for most folks before tweaking bleeds into their so-called serious money?

Similarly, recent winner of the Nobel prize for Economics, Eugene Famawhose efficient market studies many claim as the intellectual foundation for passive investingisnt a passive investor. (Incidentally, Fama coined the Random Walk term Malkiel later popularized.)

If these two founders of Random Walk theory, two folks carved into passive investings Mount Rushmore, cant or dont do it, whats the likelihood many individual investors can?

i Source: FactSet Data Systems, Inc. Figure referenced is Nasdaq Composite total return minus S&P 500 total return for the period 12/31/1998 12/31/1999.