What Is Passive Investing?

What Is Passive Investing?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Passive investing is a strategy that seeks to maximize returns over the long term by keeping the amount of buying and selling to a minimum. Instead of trying to beat the market, passive investors work on the assumption that the market will go up over time. They will therefore buy a wide selection of stocks or index funds, and then hold onto them. Rather than reacting to short term market fluctuations, the passive investor will spread their portfolio across a wide variety of investments and patiently wait for their portfolio’s value to increase over the years.

Related Questions

1. What is the advantage of passive investing?

It’s all about long-term potential. Because passive investing involves less trading, it generally has lower costs than active investing. Also, it helps minimize the risk of human error – such as selling at the wrong time – because the investment decisions are based on a pre-determined strategy.

2. What are some examples of passive investments?

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Index funds and exchange-traded funds (ETFs) are two common forms of passive investments. These funds aim to mirror their respective market indexes.

3. Can you lose money with passive investing?

Yes, like any investments, passive investments come with risk. The value of your investment will fluctuate based on market condition. But since passive investing is a long term strategy, it has the chance to recover over time.

4. How do I start with passive investing?

You can start passive investing by choosing a broad market index fund or an ETF. Many investment firms offer these services or you can choose a robo-advisor to manage your investments for you.

5. Is passive investing the same as lazy investing?

No, passive investing may seem like a hands-off approach but it does require careful planning and monitoring. It’s about following a systematic long-term strategy, and not about neglecting your investments.