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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free 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.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Ask the Editor: Itemized DeductionsAsk the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on itemized deductions claimed on Schedule A of Form 1040
-
9 Types of Insurance You Don't NeedFinancial Planning If you're paying for these types of insurance, you may be wasting your money. Here's what you need to know.
-
Are You Putting Yourself Last? The Cost Could Be Your RetirementIf you're part of the sandwich generation, it's critical that you don't let the needs of your aging parents come at the expense of your future.
-
Cooler Inflation Supports a Relief Rally: Stock Market TodayInvestors, traders and speculators welcome much-better-than-hoped-for core CPI data on top of optimism-renewing AI earnings.
-
Nasdaq Sinks 418 Points as Tech Chills: Stock Market TodayInvestors, traders and speculators are growing cooler to the AI revolution as winter approaches.
-
Stocks Chop as the Unemployment Rate Jumps: Stock Market TodayNovember job growth was stronger than expected, but sharp losses in October and a rising unemployment rate are worrying market participants.
-
Stocks Struggle Ahead of November Jobs Report: Stock Market TodayOracle and Broadcom continued to fall, while market participants looked ahead to Tuesday's jobs report.
-
AI Stocks Lead Nasdaq's 398-Point Nosedive: Stock Market TodayThe major stock market indexes do not yet reflect the bullish tendencies of sector rotation and broadening participation.
-
Dow Adds 646 Points, Hits New Highs: Stock Market TodayIt was "boom" for the Dow but "bust" for the Nasdaq following a December Fed meeting that was less hawkish than expected.
-
Dow Rises 497 Points on December Rate Cut: Stock Market TodayThe basic questions for market participants and policymakers remain the same after a widely expected Fed rate cut.
-
JPMorgan's Drop Drags on the Dow: Stock Market TodaySmall-cap stocks outperformed Tuesday on expectations that the Fed will cut interest rates on Wednesday.
