Passive investing is an investing strategy that involves buying and holding investments for a long period of time, rather than attempting to beat the market by making frequent trades. This type of investing has been acknowledged as a reliable and time-tested approach for building wealth, which is achieved by passively investing money in stocks or index funds that generate passive income in the form of dividends, interest, and rents. In this method, the goal is to build wealth gradually, by owning a security long-term and not seeking to profit from short-term price fluctuations or market timing. Generally, the passive investors have an assumption that the market will produce positive returns over time. This assumption is based on the historical practice that a low-cost and properly diversified portfolio held with low turnover will tend to produce an average market return without much thought. This approach is completely opposite to active investing, which calls for frequent transactions in an effort to achieve above-average returns.
As has been mentioned above, passive investors seek to diversify their portfolios with long-term holdings, balanced across multiple industries, market capitalization sizes and even countries. They follow the principle of never selling these holdings under almost any conditions, no matter how distressed they appear to become. While passive portfolios may include different types of investments such as stocks or bonds, the index funds are recognized as the most essential. Rather than select single securities, these funds seek to diversify across a number of individual holdings. Thus, index funds offer simplicity as an easy way to invest in a chosen market as it minimizes the risk - if one stock or bond is down (for the day or a year), another is probably up.
However, it is important to know about the drawbacks of passive investing as well. For instance, since the index funds track the entire market, when the overall stock market or bond prices fall, so do index funds. Another risk is the lack of flexibility. Passive portfolios usually contain a majority of funds that are under the jurisdiction of fund managers. Thus, this lack of customization and flexibility could leave passive investors feeling like they’re not involved enough in the overall management of their money. There are also smaller potential returns compared to active investing, but it is less risky and most of the time passive investors see slow and sustained growth.
Finally, since passive investing is a long-term approach, it’s most suitable for those with long-term financial objectives such as saving up for a retirement or for their child’s college education. Before investing any money in the market, you should take some time to learn about the strategies available to you.
At Monest we can help you to get smarter with your money, if you’re ready to embark on the successful investing journey than fill out this form https://www.monest.biz/ekyc to get started.
By Adil Maidanov | 5th November 2020