Effective Tools for Passive Investment

Passive investing strategy calls for buying a solid collection of long-term holdings, balanced across multiple industries, sectors, market capitalization sizes, and even countries.

Passive and active investment strategies are two opposite investment strategies in the market.

While the fund manager takes the pain to carry out in-depth research into companies and identify stocks that can outperform the market with an active strategy, the passive investment strategy does not try to beat the market and instead seeks to mirror the market so investors earn as good or as bad as the market index.

The cost of active investing is much higher than the passive, making the expected return on active investment funds is also much higher. However, there is a global shift towards passive investing because of the big merit of passive investing – lower cost.

Passive funds have been getting massive inflows over the past decades but what has really reversed is that active funds are seeing massive outflows.

Warren Buffet in his letter to shareholders noted that passive funds are increasingly giving a tough time for active funds due to a combination of limited opportunities and the substantially lower costs of passive funds.

Also, two of the largest asset managers in the world, that jointly manage close to $9 trillion of the market funds are essentially passive investors, further buttressing the fact that there is a sharp shift towards passive investing.

Passive investing strategy calls for buying a solid collection of long-term holdings, balanced across multiple industries, sectors, market capitalization sizes, and even countries.

It also involves not selling these holdings under almost any condition, no matter how distressed they appear to become and regularly buying more by depositing fresh cash into the brokerage account while reinvesting the dividends.

Of course, as long as they are fundamentally strong. If this sounds like your kind of investment, here are some tools and strategies to get you started.

The Stock/ Equities Market

A passive approach to all stocks even to direct equities. An equity investor can create a passive strategy by buying up all the index stocks in the same proportion as the index.

By doing that, the portfolio performance will approximately reflect the performance of the index over a longer period of time. However, the common approach is to buy and hold stable stocks with good fundamentals

Index Funds & ETFs

Another way to replicate the above will be to directly buy an index fund, which is offered by many mutual funds as an index fund typically buys up the entire index stocks in the same proportion as the index. ETFs are a slight variation of the index fund.

Like an index fund, the ETF also creates a portfolio of index stocks in the same proportion and the only difference is that the ETF is listed on a stock exchange and can be bought and sold on any recognized stock exchange.

Dividend Stocks

Specifically, buying and holding a portfolio of dividend yield stocks can also be very effective. A stock that offers a dividend yield may have a lower tax- adjusted return as well. Many high dividend yield stocks are from stable companies; hence; the volatility risk is relatively low with such stocks.

Mutual Funds

With mutual funds, you can invest in a wide range of investments from real estate, to the money market, to stocks etc. While you will pay an additional fee for the professionally managed fund, you can rest at night knowing that the fund managers have a fiduciary responsibility to put your interest first.

Written by Lawretta Egba.