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How To Approach Passive Investing


Passive investing refers to an investment technique that seeks to increase returns by limiting purchasing and selling. One of the most popular passive investment strategies is index investing, this means that a group of investors buy a representative benchmark, and keep hold of this over a long period.

Investopedia defines passive investing as,  a buy-and-hold portfolio strategy for long-term investment horizons, with minimal trading in the market.’ There are several advantages of passive investing, including:

  • You Can Benefit From Low-Fees: When no one is choosing stocks, oversight is less costly. Passive funds use an index as a benchmark.

  • Simplified: Investors can clearly identify the assets that an index fund contains.

  • Tax Efficient: Buy & hold methods don’t usually land you with huge tax expenses.

  • Easy To Manage: When you own indices or an index, it’s easier to manage than a more complex investment strategy.

  • Reduce Risk: Indexes tend to include hundreds of investments and stocks, when you diversify you can reduce your risk of experiencing losses.

  • Takes Up Less Time: You won’t have to research individual stocks, the portfolio manager can be trusted to invest in the right index.
     

How to approach passive investing?

Frequent handling can increase fees and compromise performance, which is what passive investing seeks to avoid. The goal of passive investing seeks to build up wealth over time. Active traders aim to profit from short-term price fluctuations. With passive investing, it’s more about the long game.

 

Most passive investment strategies start with an index fund. These investments work by monitoring a market index, usually consisting of bonds and stocks. First, you’ll need to choose an index to fund, then select a fund to monitor your selected index. The third step is to purchase shares of that particular index fund.

 

Passive investing can help you to avoid the cons of active investing. A few of the cons of active investing include:

  • Active investing tends to be pretty expensive, with higher fees than passive investing. More purchasing and selling results in higher transaction costs.

  • These investments can be riskier, managers can go after high returns (which usually involve more risk).

  • Some of these portfolios tend to perform poorly, (particularly when you account for expenses and taxes).
     

To get started with passive investing, you can take the following steps:

1 . Select your index

Your starting point is to select an index, one of the most common options for index investing is the S&P 500 Index. This index includes 500 of the biggest publicly traded businesses across America and the index is based on market capitalization. Some of the other popular indexes include Dow Jones Industrial Average, MSCI Emerging Markets, or Russell 2000.

 

2. Choose a fund

Next, you’ll need to find a fund that tracks your index, there will likely be a few different options to choose from. When you’re choosing a fund you’ll want to look for a fund that accurately monitors the performance. You’ll also want to consider costs, (you may want to think about the least expensive funds). Some funds have restrictions that prevent certain investments, so you’ll need to check this also.

 

3. Purchase shares

The next step is to purchase shares within the index fund. You will be able to get an account with a mutual fund service, providing access to that fund. If you prefer you can open a brokerage account and get access that way. When you’re purchasing shares you’ll want to review features and expenses. When you’re deciding where to purchase from, these considerations may come in handy:

  • Commission-free: You might want to look for mutual funds or ETFs that offer zero transaction fees.

  • Make a difference: If you’re looking to make a difference with your investment, some index funds target companies involved in worthwhile causes, from the environment and social issues to female-led businesses.

  • Consider convenience: It’s easy to look for one provider who can meet all your needs, (this will depend on the type of investments that you’re looking to make).

 

The takeaway

With all these tips you’ll be ready to start investing. As you can see there are plenty of benefits of passive investing, from lower fees to less taxes, less risk, and simplified processes. Beginner investors can avoid the risks associated with active investing, and focus on making a profit over time. You don’t need much to get started from home, all you'll need is a decent laptop and you can get started on step one! If your Macbook has been playing up lately, this link can help you to speed it up. Once you’ve chosen your index, you’ll be well one your way, as a beginner it’s advisable to get all the advice you can.

This is a contributed post.

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