What Is Passive Investing?
Instead of trying to beat the stock indexes, track them instead.
When it comes to saving money for the long term – that is, ten years or more – investing your money usually delivers better returns than simply saving it up as cash in the bank. This is why any workplace pension you have, for example, will at least partly be invested in the stock market, and most of the rest will be in bonds.
Most of us don’t have the time, patience or enthusiasm needed to research, buy, and sell individual shares for our own portfolios. This is why most people hand their money to a fund manager to do it for them – the fund manager gathers the money together and invests it in a portfolio of shares. This is known as “active management”.
So far, so good.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
When you invest money with an active fund manager, you want to know that they are using their skill to deliver you the best return they can. In the jargon, you want to know that they can deliver “alpha”.
So if your fund manager is investing in big U.S.-listed stocks, for example, you would probably want to compare the returns the fund gives you with those of the S&P 500. You’d use the S&P as a “benchmark” – a figure that you’d expect the manager to beat over time.
This is where we hit a snag. Because the reality is that a majority of active fund managers struggle to beat their benchmarks – whatever they are – over any decent length of time. That’s partly because they also charge relatively high fees, which they have to earn back before you see any return yourself.
This is where passive investing comes in. Passive funds don’t try to beat a benchmark, they just try to track it. So a passive fund investing in U.S. stocks might just buy all the stocks in the S&P 500 in the same proportion as the index.
Because this isn’t very labor intensive and can be automated, the fees are lower too. So most of the time, an investor will get a better return - and pay less for the privilege - by opting for passive rather than active management.
There are some potential downsides though – to learn more about them, sign up for our Investing Weekly e-newsletter.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
How to Help Your Kids Without Ruining Your Retirement
Here are some general considerations to ensure the gift of assets to your kids will not negatively affect your financial future.
By Mario Hernandez Published
-
AI to Power the Next Generation of Robots
The Kiplinger Letter There's increasing buzz that the tech behind ChatGPT will make future industrial and humanoid robots far more capable.
By John Miley Published
-
Stock Market Today: Markets Tumble Amid Slower Economic Growth and Rising Prices
Disappointing readings on GDP and inflation helped tank equities.
By Dan Burrows Published
-
Stock Market Today: Stocks Run Out of Steam Ahead of Meta Earnings
The Dow Jones Industrial Average snapped a four-day winning streak after Boeing's first-quarter results.
By Karee Venema Published
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
Stock Market Today: Markets Rebound Ahead of Big Week for Earnings
Equities rallied on easing geopolitical tensions, upcoming quarterly results.
By Dan Burrows Published
-
Stock Market Today: Nasdaq Spirals as Netflix Nosedives
A big earnings boom for credit card giant American Express helped the Dow notch another win.
By Karee Venema Published
-
Stock Market Today: S&P 500, Nasdaq Extend Losing Streaks
The two indexes have closed lower for five straight sessions.
By Karee Venema Published
-
Stock Market Today: Dow Slips After Travelers' Earnings Miss
The property and casualty insurer posted a bottom-line miss as catastrophe losses spiked.
By Karee Venema Published
-
Stock Market Today: Stocks Stabilize After Powell's Rate-Cut Warning
The main indexes temporarily tumbled after Fed Chair Powell said interest rates could stay higher for longer.
By Karee Venema Published