Passive investing is a strategy that maximizes returns over a long period of time. This strategy focuses on buying securities and holding them for years before selling for a minimum. It is made to counter drag on performances often evident in frequent trading. Its goal is not to make quick gains, but to gain slow yet steady wealth in time.
This investment strategy has been outperforming active funds for years and it’s expected to continue rising in the next years.
Exactly what makes passive investing a great hit?
When the index funds were introduced back in 1970s, gaining returns that were in line with the current market became easier. The process was further simplified with exchange-traded funds, or ETFs, which allowed investors to trade stocks. Since then, more and more investors have begun noticing the profitability of this investment strategy.
According to The Wall Street Journal, there are three main reasons why passive investing is getting ahead of active investing:
- There are higher expenses for actively managing your funds.
- Passive management allows the possibility of beating the market and maximizing your investment.
- More and more investors are putting their money to ETFs and passive US stock funds.
Still, passive investing comes with challenges…
Holding on to securities for a long time requires a lot of patience and willpower. Those who easily waver when the market changes will most likely fail in using this strategy. You have to resist the urge to sell every time the market is in downturn.
Another challenge one might encounter when using this strategy is in liquidity errors. Since price transparency is usually elusive, depending on the securities you trade, it’s hard to get an approximate of the indexes. This is especially true during outflows and inflows. As a result, there’s a high risk of making a tracking error.
How to initiate a powerful passive investing?
A passive investor does not concern him or herself with a company’s performance in relation to its stock price. Rather, they are more involved in owning markets. They then takes the following into account:
1. Fund benchmark- This is necessary for meeting your financial goals with lesser risk.
2. Fund strategy- ETFs can be in swapped or physical form. Both carry their own risk so calculating the benchmark is essential.
3. Fund investment- Read product brochures and factsheets to gain an overview about the provider’s website before you make an investment.
4. Counterparty risk- Counterparty risk is usually common with a swap-based fund. Seek professional advice to guide you in addressing this.
5. Fund policy- If you’re going to use ETFs and index funds with securities lending, then make sure you understand the fund lend securities, the indemnities, and the collateral.
6. Tax position- It’s true that ETFs and index funds are domiciled in other countries. So it’s essential to understand that the fund is intended for local customers.
7. Platform- Since there are already a lot of platforms popping up on the market you need to take your time evaluating them before choosing one.
If you have the drive and the right frame of mind, then it’ll be easy for you to achieve your reasonable goals through passive investing.