A lot of screens with flashy numbers on green and red. Suited people are shaking paper bills in their hands and yelling at each other: “BUY, BUY! SELL, SELL!”. When you hear about investing in the stock market, you probably think of typical chaotic movie scenes about Wall Street. These scenarios may be real in some cases, but there is the other side of the coin… passive investing like everything in life.
If you are the kind of person that prefers to have an average life, sipping a cup of coffee sitting on your deck, with the confidence of having your money-making gains slow but steady, passive investing could be a better option for you. Keep on reading to learn more about it.
What is passive investing?
Passive investing is a long-term investment strategy that avoids frequent buying and selling transactions. Based on the assumption that the market itself provides positive returns over time, passive investors tend to look for securities they can buy & hold for the long run.
If you can’t defeat them, join them. That should be the motto of passive investors as they don’t care about the everyday hustle of trying to beat the market. Instead, they play by its rules.
What about active investing?
As you can notice only by their names, they are complete opposites. So, like day and night, black and white, yin and yang, we find active and passive investing.
For an active orientation, an investor studies the market and constantly looks for the best opportunities to buy stocks and sell them on time. It requires much more analysis and experience because the point is to get the most out of market fluctuations and beat the stock market’s average returns.
How to implement a passive investing strategy?
A passive investing orientation will look to build a portfolio that doesn’t require frequent maintenance. There are a couple of ways to do this:
Blue chip stocks
If you have played poker, you know that the most valuable poker chip is the blue one. That’s where this term comes from. Blue chip stocks are shares from the most valuable companies in the market.
Besides their strong brand reputation, blue chip companies have a neat record of delivering constant returns over and over. Some of them even have regular dividend payouts that have mostly been increasing over the years.
Some say these companies are too big to fail, that’s why they are a perfect passive investment option. Investing in blue chip stocks would mean putting your money into an investment from which you will passively reap benefits in form of dividends or stock price increments.
Index funds
A second method to approach a passive investing strategy is by investing in index funds. These are investment funds that try to keep the same performance as a market index. So if you invest in an index fund, you’ll proportionally own shares of the companies included in such index.
For example, let’s imagine buying a share of an index fund tracking the Dow Jones Industrial Average. Now, let’s say that 10% of this index comprises an Electronics Company’s stock. The firm that manages the index fund will replicate this behavior, making the fund 10% composed of the stock from the same company.
Index funds are such an effective option to invest in that even the great Warren Buffett recommends them. He has stated that, by investing regularly in index funds, any beginner investor could outperform most investing pros.
Benefits of passive investing
Now that we understand what passive investing is and how it works, let’s check out some of the main benefits you can get out of it:
- Less time spent: It is probably the main advantage passive investing has. You don’t need to constantly keep checking your portfolio or stress about the perfect moment to buy and sell.
- Long-term investments: In short-term investments, the market can have different types of variations, for good or bad; it’s tough to anticipate what will happen. However, long-term investments tend to result in good returns despite short-term volatility.
- Low fees: By simply buying an investment and letting it increase in value, you can avoid the costs that come from frequent buying and selling transactions.
In conclusion
Anticipating what’s going to happen with the market is very difficult, some would say it’s impossible. By keeping a passive investing strategy, you won’t have to deal with stressful volatile scenarios and numerous transactions all the time.
Whether it is investing in blue chip stocks or index funds, there’s not that much experience you need to get started. Feel free to take a look at the rest of our library to find some more investing tips that could come in handy as you go through your journey.
