If you are a long term investor this is yet another strategy for you. The passive investment strategy is a long-term index fund trading. Here you need to maintain a diversified portfolio to gain earnings. You have to perform a minimum level of buying and selling of stocks and once you have bought you have to hold it for long period.
So, this is going to work on the concept of buy and hold.
Here you need to have patience as a long term investor you need to believe in the concept that slow and steady, your wealth will grow, over a long period of time and maximize the return rather than in short period of time.
In passive investing human behavioral intervention is very less and the portfolio will perform as per the index it is made to trace, hence unlike active investment, requires low fees for fund managers.It eliminates market analysis and believed that market is sufficiently efficient.
It’s a slow way of making wealth and return is less.
This strategy involves investing in a group of companies called index and building up a portfolio which retraces a market index to almost similar level. If all the companies perform well so will the index and hence our money will grow.
Diversification of company within index helps to reduce the risk of loss that is if one company underperforms other will make up the loss.
This associates it with an index fund like mutual funds and ETFs where all eggs are not in the same basket rather a diversification in the asset class is maintained.
In passive investment portfolio does not outperform the index rather ensures that it will generate same return as of the index hence has slow growth potential.
Investor here needs to have knowledge of index which needs to be followed.
Well established and diversified companies are selected as it does not involve any type of analysis. The only crucial step here is the selection and making a portfolio which retraces the desired index, which may be a bond index, a commodity index or any other index.
Are you the right person? Who should use this?
So if you want to earn but reluctant to take a high risk this is for you. Index goes according to the market and gives a return in long term hence eliminating market analysis. It becomes the best choice for those who want to stay out of regular buying and selling of stocks and wants to avoid regular analysis of stocks involving fundamental and technical analysis. This helps you to make the investment and simply forget and just wait for the return.
- Buy and hold strategy
- Good for long term investment
- Eliminates market analysis
- Cost less compared to active investment
- Do not outperform the index it is tracking.
- Associates low risk
- Diversification in asset class helps to reduce individual company’s ups and downs.
So this is one of the ways to reduce risk and I would say such things make the stock market for everyone that is for high as well as low-risk takers.
If you are not willing to do it all alone you get fund managers to do it for you. Just be aware what you are doing and don’t rely all your investment on one type of share rather prefer diversification.
So if you are a wise man you would realize
“A wise man does not trust all his eggs to one basket”.