Passive investing usually means that the investor devotes a minimum of time to analyzing individual securities and the market situation. Instead, he focuses on determining the asset allocation that suits him—the portfolio’s proportion of stocks, bonds, and other assets—and strives to diversify.
Instead of individual stocks and bonds, passive investors often use exchange-traded funds. This makes it easy to create a diversified portfolio: the funds contain tens and hundreds of stocks and bonds.
Numerous lazy strategies are built on this principle. We have already written about four lazy portfolios and six more strategies for passive investing.
A passive investor will receive a return at the market level in which he invests; that is, he will not be able to overtake it. On the other hand, he will not lag the market. And since markets tend to rise in the long run, the outcome is likely to be good.
At the same time, the investor does not spend much time and effort on portfolio management. This means that he can pay more attention to income growth, save more money, etc. Reaching the goal can be more beneficial than trying to beat the market.
All strategies in the stock market can be divided into speculation and active and passive investments. Private investors often try different approaches until they determine which method brings the best result. I will tell you how the passive investor works.
The passive investor’s strategy is “buy and hold.” This means that he is not trying to overtake the market but is counting on the growth of quotations in the future. At the same time, a passive investor invests money for years or even decades. He makes few transactions and pays small commissions to the broker.
The main instruments of a passive investor are ETFs. These are exchange-traded funds, including index funds. Investing in funds provides several benefits:
- You cannot study companies’ economic models and not dive into fundamental analysis.
- It is possible not to follow the daily market situation.
- A portfolio consisting of stocks or funds is diversified by default.
- Reduced risk.
Since the passive investor does not have to monitor news and charts or worry about price fluctuations, he rarely makes decisions at purchase.
The most striking example of successful passive investing is Warren Buffett’s famous bet with Protégé Partners in December 2007. Buffett bet he would bet on the S&P 500 and beat an opponent who had bet on active management in five different funds. He made a bet over ten years, and Buffett won: By the end of 2017, the S&P 500 index fund was up 125%, while Protégé Partners managed to earn about 88% during this time, which was the best result of the five funds selected.
Passive investing is suitable for those who set long-term financial goals and are not ready to spend much time on asset management. ETFs on stock and bond indices can show good results in 5-10 years. In this case, you do not have to track the financial performance of companies and select stocks individually.
The following conversation is about setting financial goals.
If you have a portfolio of securities worth more than 3 million rubles, we recommend that you conduct an audit – it’s free. You will receive a professional personal broker opinion based on Argus Research and BCS Global Markets analytics.
Yield
The amount of income from investments is one of the first conditions for choosing one or another investment instrument. A long-term investment is an essential factor in increasing profitability.
Attention! All types of speculation, designed to receive large incomes in the shortest possible time, are taken out of the scope of the review.
The degree of increased initial contribution over a certain period is called the return on investment. It can be expressed as a percentage or in currency. Depending on the way of expression, two types of investment income are distinguished:
percentage (dividend).
Cost
Interest income is expressed in the funds that the issuing company accrues per share.
Reference. The conversion of interest into money shows the dividend value of the share.
Return on cost shows the increase in the value of an asset compared to its original price.
Attention! Ownership of shares provides an opportunity to receive both types of income. The shareholder may receive dividends if provided for by the dividend policy of the issuer or sell shares on the stock exchange.
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