Are you into investing recently? Getting some new terms for which you need some information, and you recently got to know about Passive Investing from someone? Today we are going to talk about the same, and give you all the basic information of what is passive investing, why we use it, how to use it and much more.
Starting with the definition of passive Investing: This is a financial strategy, where the investor invests the amount slowly and steadily and buying a limited number of credits. The basic idea for this turns out to be avoiding the fees and drag of performance that can potentially occur on our investment due to frequent trading.
By using the Passive Investing strategy, you will not be able to get rich with just one single bet or will have some quick gains, so it is not for you if you are planning to be in the industry for a short period of time. You will have to wait with this strategy and here you will be building the wealth with a slow and steady form.
This strategy also translates into buying and hold strategy. Here, buyers buy the shares or bonds or anyother investment instrument with plans of owning the same for at least the next few years, where you will not be going to profited for some small term ups and downs in the market.
You will wait for the right moment to come before you make some profit against your investment. Passive investors, unlike active investors, don’t attempt to just buy and sell within a month or two for some short-term price fluctuations.
Strategy behind Passive Investment
If you want to become a Passive investor, then you need to get some heavy research done on each and every company where you are planning to invest in. You have to construct some well-diversified portfolios of stocks off each and every company and judge the market performance. This does require intensive research and you need to research for the same to get some hard results.
From 1970 we have something known as Index funds; they were introduced in early 1970’s only. With the help of these Index funds, it made it quite easier for people to achieve returns in the market. Till the 1990s, all we had were the Exchange Traded funds in the market, and it tracked major indices and up & downs in the market. They actually simplified the whole process by allowing the investors to trade the index funds just as they can do with stocks.
So till now mutual funds and ETFs both allowed for index investment. Now people can easily invest with a really low research, which results into some ease for the people. If you are going to become a passive investor then you have to look after that you are really strong at heart. You must not actually sell your shares or funds when you start to see some sudden fall in the market.
For example, iShares Core S&P 500 ETF and other ETFs who were tracking the S&P 500, started to suffer quite a significant loss, and many investors panicked and started to sell off their shares and funds just for the cause that their investment must not end up with a huge loss. But later it translated into a huge mistake.
This implies that, if you are planning to become a passive investor then you must have a strong heart to deal with the ups and downs of the Industry and be waiting till you get some good deal to sell off those shares or funds to make some real profit.
Let us now talk about some of the misconceptions that people have in regards of Passive Investing, which we will clear out today.
- You must not do any action after buying shares in Passive Investment: If you are feeling by reading some or the other advice, that you can simply place the money in some or the other index funds and wait for some huge profit to happen slowly, but it is not the same case anymore. If you are the investor you need to keep looking after the company you invested in, construct the portfolio, and then observe, and if you see some upcoming downfall then sell the funds.
- Passive Investment Strategy is not as good as Active Investment Strategies: Most of the people generally say that with Passive investing believes one cannot surpass the set of active investors. You cannot tactfully manage the change with market swings or take some or the other advantage of the future events. If you look with more attention you can find that the passive investment part is much more uniform than the active investment and even the next investor can follow the same strategy.
- Active Investors have the much better condition than that of Passive Investors: With the definition of passive investment we gave above, it is quite clear that passive investors will be in the market in case of falls and be in losses for the time till there is some hike in the prices. While active investors’ convert the amount in cash when they sense some danger in the market. There is typically no evidence to clear on which is the better of the two, and we cannot make out the best tactic.
- Active investment is more tax efficient than Passive investment: As you know, many times when we buy things, the prices increase by a huge margin. Similarly, when we get into some profit with such investments we have to share a bit with government and hence we can fall in losses due to the same. There is a belief about Passive Investment being less tax efficient and is true for some, but if you are having some greater knowledge, then you can easily escape the tax by huge margins.
In the current scenario, passive investment can be used to investment anywhere. You can explore the age old conventional instruments like real estate, equity, bonds and go with the futuristic options such as cryptocurrencies and mutual funds. However, passive investment cannot come handy when you into derivative products such as options, forward contracts.
So today we have made many misconceptions cleared for you, wait we have even cleared what actually Passive Investing is. If you are planning to be into passive investment and become a passive investor, then do think about the same again, and get your facts cleared about the same. Undoubtedly, you must be a good researcher to step into the passive investment market.