What Is Passive Investing?
Passive Investing is an investment strategy in which investors buy an asset and hold it for long, hoping that the price would appreciate over to sell it at a higher price.
Passive investing, also known as passive management, is a buy-and-hold investment approach that focuses on long-term gains. It is a long-term investment strategy in which investors do not trade frequently. Instead, they buy and hold onto a diversified portfolio of assets. Investors who take this approach believe that they can gain higher returns over time by going in and out of the market as little times as possible.
The passive investing strategy is the opposite of the active investing strategy. Acting investing, also known as “active management,” is an investment strategy that requires investors to continuously monitor their portfolios to take advantage of short-term price fluctuations. It requires that investors know when to buy and when to sell. Investors who take the active management approach seek to make short-term profits.
For many investors, especially new investors, passive investing is the go-to strategy because understanding how it works is simple and executing the technique is straightforward. Essentially, the method involves buying and holding stocks that have the potential to appreciate over the long term.
The critical characteristics of passive management include:
- Optimism: The core principle behind passive management is the hope that the stock market will go up over time along with some assets.
- Diversification: Passive management gives room for portfolio diversification because it does not require continuous monitoring.
- Less risk: Passive investors often spread risk by holding various securities, often in different sectors of the economy, in their portfolios.
- Lower costs: By limiting the amount of buying and selling securities to the barest minimum, the passive investing strategy offers lower fees and operating expenses than active investing.
Passive Investing Example
Passive investing, due to its simplicity, has gained prominence among the masses. For instance, Lilian operates a small catering business. Using some of the profits she’s making, she bought the stock of four promising companies. Lilian does not know much about active management. She also does not have the time for it because she’s busy attending to her business. So, she leaves her portfolio relatively unmanaged. Three years later, Lilian checks her portfolio and discovers that her investment has appreciated by 600%. Lilian sells the stock and uses part of the profit to buy new stocks. She then invests the rest into her business.« Back to Glossary Index