Passive investing 102: What is passive investing?

Pas-sive – not reacting visibly to something that might be expected to produce manifestations of an emotion or feeling.

In most areas of life, being active is seen as the optimal choice. “Pursue your dreams.” “Take life by the horns.” “Don’t sit back and wait for life to happen to you.” However, when investing, being active can be a costly choice.

Common Misconceptions:

Often, people think passive investing means putting your money in an index fund or other investment and ignoring it. While this is definitely passive, and how some people work their investments, that is not “Passive Investing.”

Others imagine passive investing more as being indecisive and afraid to take action. Again, this is passive, but not “Passive Investing.”

“Passive Investing” means you make an investing plan and stick with it. You set allocation percentages, investment schedules, and avoid “Active Trading.”

“Active Trading”:

Now, Active Trading is what Wall Street encourages you to do. But what they don’t tell you is that Active Trading generates more earnings for them from fees and commissions.

While some people can make good money and even beat the market by active trading in the short term, most people (especially after fees and taxes) do not outperform the market or passive investors in the long run.

Remember that Warren Buffett earned his billions through buying and holding companies, not through day trading. Also, in turbulent times, don’t worry about trying to time the market, rather investing at regular intervals has (historically) been more successful.

Don’t Wait

If you wait for the market to drop before investing, you may miss out on gains and dividends in the meantime. If the timing concerns you, you should consider the passive investing strategy and, rather than invest $10,000 at one time when the market is down, start now by investing $1,000 per month, or $100 per week, and you will reap the rewards that you may otherwise miss out on.

Also, for those of you that don’t want to be overly involved in finances, passive investing only requires your attention to review your plan over time to make sure you are still on track.

Value Your Time

Remember, active trading takes a lot of your time away from other activities. By passive trading, you free up hours of your week that you’d otherwise have to spend reading financial news, researching companies, and trying to time the market. Passive Investing means you sit back and let your money work for you rather than you working for your money.

Let me know your thoughts in the comments below.

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