Passive Investing

What Is It?

Passive investing is an investment strategy in which, instead of trying to “beat the market,” an investor attempts to mimic the return of a stock or bond market index (the U.S. S&P 500 index, for example). It is called passive investing because portfolio managers don’t make decisions about which securities to buy and sell; they simply buy the same securities which make up their target index. The strategy attempts to improve long-term returns by minimizing buying and selling transactions, reducing the negative impact transactions can have on performance.

In the past, investors seeking to pursue a passive investing strategy had to do so by building a portfolio containing all the individual stocks making up a stock market index. This was difficult to do, and it wasn’t until the introduction of index mutual funds and later ETFs (exchange-traded funds) made it much easier for investors to build portfolios that accurately track the market that passive investing was able to achieve broad popularity.

How Is It Used?

SmartWealth uses a passive investing strategy to help investors build wealth over time. We use ETFs to enable investors to build portfolios which allow them to participate in the returns of markets around the world in accordance with their investment goals and investor profile.

Passive investing has gained in popularity in recent years as studies have shown the difficulty actively managed funds have in beating market indexes. For instance, the 2016 SPIVA US Scorecard found that, in 2016, 93% of actively managed U.S. based equity funds performed worse than the benchmark they tracked in 2016, measured over a three year period.

The passive investing approach, unlike active investing, is not aimed at making short-term trading gains, but instead at building wealth slowly and steadily over the long run. The strategy avoids trying to “time the market” in favor of a buy-and-hold approach that attempts to capitalize on the tendency of equity markets to provide positive returns over long-term time periods.

Other Considerations

Passive investing is not a strategy that seeks to beat the market, so investors whose goal is to outperform market indexes are more likely to prefer active investing. Passive investing is more suitable for investors who want to build wealth over the long haul, rather than taking on higher levels of risk to attempt to achieve market-beating results in the short run. Investors seeking to outperform the market who are willing to accept the higher risk that comes with this approach are more likely to achieve their objective by pursuing an active investing strategy.