Many minority investors perform a passive management of their investment where the objective is to place savings in financial products, such as shares or fixed-income products. This investment provides an annual income with the objective of minimizing risk without taking control as detailed or exhaustive as an active investment.
Motivation for Passive Investment Management
Most minority investors do not have adequate financial training to manage their portfolios. If they do, they cannot devote the time required for this type of investment since the number of variables and factors to consider seems almost endless. However, any minority investor knows that large securities and fixed-income products are safe investments that have virtually no risk despite not maximizing the return on investment.
On the side of fixed income, the most important financial products are fixed-term deposits. Banks immobilize customer money by offering an interest rate for capital in exchange. Often, a fixed-term deposit is the star product of most banks. Additionally, there are other products, such as public debt or corporate debt, in which savings clients act as lenders of public and private entities, respectively.
On the equity side, passive investment is based on the purchase of shares of large corporations, such as Santander, Telefonica, BBVA, or Iberdrola, which usually have generous profit-sharing policies among shareholders. That is, the saver buys shares of these companies to obtain the dividend that provides an inevitable return on their investment in addition to the revaluation of share value.
Recently, the scrip dividend strategy has been extended, which is based on capitalizing the dividend or converting this income into shares. In this sense, many investors have seen how the number of their shares increases, thereby increasing the dividend to be received and seeing their portfolio grow almost automatically.
Investment Funds
There are almost as many financial products as investment strategies, either active or passive investment. Within the first group, for example, variable investment funds or pension plans are included, whose results depend on the decisions of a manager that modifies their composition based on expected results.
Within the second group, there are investment funds, such as Exchange Traded Funds (ETFs), which replicate the evolution of the stock index like the IBEX. The fund will be composed of the same values as the index with a similar weight, making its evolution similar to the index’s evolution.
In the case of ETFs, the manager’s job is to change the composition of the portfolio based on the changes introduced within the index. For example, if a value leaves the index and another value enters, the manager would be in charge of liquidating the positions of the value that leaves the index and, subsequently, acquiring new shares of the value that is incorporated.
Conclusion
A mixed strategy may be appropriate depending on the profitability you want to achieve and the risk you want to assume. In any case, the question to ask should be: When can I carry out a passive management of my investment?
Obviously, the risk and investment attention to buying shares is not the same between a large and emerging company with growth potential but volatility. When investing in smaller, riskier companies, it is necessary to have more exhaustive investment control to avoid significant losses. In these cases, passive management can be counterproductive.
This decision to engage in active or passive investment is personal to each investor or saver. There is no better or worse strategy because each strategy will vary depending on the needs and goals of the investor. Each situation is different, so it is important not to put all your eggs in one basket but to diversify.
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