Passive investing refers to the process of making investments without actively monitoring them. By “actively” means that you are still involved in the decisions and actions of your portfolio, though your efforts are limited to the decisions and actions of your principal investment managers. Passive investing is a popular investing strategy that specifically tracks a managed index or portfolio with an eye to long-term returns. This type of investing has grown in popularity with many different investors looking for good value and increased stability.
The difference between passive and active investing is that actively managed funds require the involvement of the investor, while the manager keeps his or her eyes and ears open for signals to invest in certain markets. Active investing is most common on the bond market, where bond funds track an index, but eventually it’s becoming increasingly popular in other investment areas, including commodities, stocks and derivatives. Some actively managed funds even deal exclusively in equities. For investors who don’t want to be constantly tied to their portfolio manager or who are looking for a more flexible investment style, passive investing can be a good solution.
With passive investing there are two primary parties involved: the index provider and the individual investor. Many investors are comfortable with this arrangement because it leaves them more control over their portfolios. With standard mutual funds, the costs of purchasing units can be a substantial expense in comparison to the fees paid to the index provider. Also, the stocks purchased through index funds don’t have to be of a particular publicly traded company. The price of a given stock can be tracked by analyzing the movements of the index itself rather than a company’s stock price.
While not all investors are comfortable with the idea of passive index funds, even those who are more conservative prefer the added safety and greater control over their investment decisions. By keeping a portion of their portfolio in standard active managed funds, they can avoid the possibility of picking bad stocks that will lose value and have large draw downs on their account. But there are also some investors who prefer the added security of having their own money management strategy. Index providers are able to provide such services by retaining ownership of the stocks which they manage, so this option gives them an interest in seeing the portfolio do well.
Many investors prefer to use passive investing strategies because they don’t depend as heavily on active management and don’t have as much to do with the day to day operations. They have complete control over what they invest in and just need to check in occasionally to see how things are going. This is convenient for busy executives and stay at home moms. However, active investment management can still be a valuable part of a solid investment management system because it lets investors make sure that the money they put into the fund is doing well and is not just sitting there waiting to be re-invested.
While passive investing offers investors more flexibility in the way they handle their investments, there are some things they should keep in mind. Anytime you invest money in an asset and don’t see a corresponding increase in your account value, you may want to think about selling that asset and getting immediate cash. There’s nothing wrong with wanting to do this if it helps you make more money in your portfolio. On the other hand, if the returns aren’t good enough and you need to hold onto your investment for longer periods, it’s probably better to stick with what you have.
Another important thing to keep in mind when using passive investing strategies is to choose your manager carefully. Some managers excel in active management, while others have proven themselves to be more adept at developing a portfolio that grows with little or no outside help. When evaluating your manager, look for someone who has a track record of success who isn’t afraid to take calculated risks. The best passive investing managers are those who can successfully adapt when circumstances change and are able to develop a strong defensive strategy. Some investors tend to be more conservative, while others like to inject a bit of risk into their portfolio.
For many investors, passive investing is a good way to build a strong foundation for a solid retirement fund, especially since those investments don’t come with as many inherent risks as their active counterparts do. When choosing between active and passive investing strategies, keep in mind what will benefit you the most from them. Your goal should be to find a mix of both which you can comfortably manage on your own, without having to pay anyone else to do so. By taking the time to do your research, learn about the different options you have, and talk to experienced investors, you’ll be able to get the most out of your passive investing. When you’re ready, talk to your accountant and financial adviser to see what kind of assistance you might be eligible for in order to ensure that your portfolio grows in a tax-deferred manner. You may be pleasantly surprised by all the options available to you as a passive investor.