November 9, 2021
When you hear the term "passive investing," you might wonder if this means you can just invest money and walk away.
There is some truth to this; once you have an account set up, passive investing can feel pretty breezy in the sense that you don’t have to research individual stocks, track their prices or make sudden moves.
However, just because you can be hands-off doesn’t mean there aren’t a few things you may want to keep in mind, like your investing goals, fees and your investing time horizon.
And, since this is investing: You need to think about risk. Regardless of whether you choose active or passive investing (we briefly summarize active investing a little lower down) investing is a bit of a gamble because there’s always the possibility that you could lose money.
Still sound good? Great. We’ll take you through some passive investing basics to consider before you decide to go all in.
Passive investing is not a get-rich-quick scheme. Instead, it’s an approach for investing for the long term that may include making – wait for it – relatively few trades.
In other words, this approach is not like the movies where you see people waiting for the right moment to pounce and make a trade. With passive investing you generally don’t need to track individual stocks or bonds because you’re typically invested in an array of holdings through something like an index or ETF fund (we cover this in a section below).
One of the ideas behind passive investing is to stick with your “investment variety pack” for an extended period of time. (How this approach has worked out in the past is addressed later.)
As you can probably gather from the name, active investing is a bit more hands-on. Active investors keep a watchful eye on the market and research things like market trends, company fundamentals and economic forecasts to help determine how they’ll move their money into (or out of) different investments.
Yes, it’s possible to invest actively on your own. But if market volatility isn't your second language, you may want to consider using the pros. Fund managers can oversee active investments.
Generally, they navigate market changes by watching and adjusting invested assets based on what they believe will bring the greatest potential returns given market conditions based on the level of risk they are willing to take on. But remember, even the best portfolio managers can’t predict the future or always outsmart the market with their picks.
When you follow a passive investment strategy, you usually invest in either an index mutual fund or exchange traded fund, commonly known as an ETF.
Here’s an overview of the two typical options:
By now, you probably understand that passive investing tends to be less involved compared to active investing. (Again, the name gives it away!) In addition to typically requiring less effort, some of the other benefits of passive investing are:
Some of the possible downsides of passive investing:
We mentioned fees above, but what do they cover? Some back-of-the house account work and some fund fees. Here’s an example of what you may come across:
A passive investing strategy might work for you if:
So you know the mechanics – nice! – now there’s the question of who you want to do the passive investing for you.
We’ll be fast. You could:
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Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Neither asset diversification or investment in a continuous or periodic investment plan guarantees a profit or protects against a loss.