What is passive investing?
Passive investing is an investing strategy focused on buying and holding low-cost index funds/index ETFs or other assets like stocks or real estate for the long term, with little interference in terms of frequent selling or active trading (sometimes called portfolio turnover) in order to minimise trading fees. It is a hands-off approach. It takes comparatively minimal effort and has the potential to produce inflation-beating returns over the long term via compound interest. There are several forms of passive investing, including buying real estate, owning dividend stocks, buying index funds, or purchasing art. This assumes the buyer isn’t selling the asset soon after they purchased it – that would make them an active investor, the opposite of passive – but rather holding on to the asset for the long term. John Bogle is often credited with being the father of passive investing. He was the CEO of Vanguard and, in 1976, he launched the first fund that tracked an index, which was available to retail investors. It was called the First Index Investment Trust.
Passive investors hold for the long-term, but how long that is will vary, based on the individual. For some people, the long-term is a few years while, for others, it’s 20 years or more. The timeframe of the passive investment strategy often depends on how long the investor has until retirement, which is typically when funds start getting withdrawn. For example, for a 20-year-old passive investor, their timeframe to retirement is typically 40 to 45 years. For someone in their fifties, they may only be holding their passive investments for another 10 years. The goal is to minimise selling then rebuying, which is active investing as it incurs fees which can be seen as a drain on the performance of a portfolio. Passive investors add to positions but rarely close out trades until retirement. Learn how to invest in ETFs using a passive strategy.
What are the benefits of passive investing?
Warren Buffett – the famed billionaire long-term investor who is the CEO of Berkshire Hathaway – believes most people should be passive investors in index funds. There are a few reasons for this. Here are some of the benefits:
Passive investing keeps fees low. The more fees generated, the higher the return needed to compensate for those fees.
