Passive investing is a strategy whereby you invest in a stock market index (that thing that tracks top performing companies in different sectors/markets). Today, this can be achieved by investing in ETFs - many of which mimic the performance of stock market indices such as the FTSE 100, NASDAQ, Dow Jones, Hang Seng, and so on.
Pros:
Cost: ETFs offer a very cheap way for individuals to access financial markets and diversify their portfolio.
Long term results: investing passively in a stock market index over many years has been shown to outperform “active investing” (stock picking) which typically uses time-consuming technical & fundamental analysis to figure out which stocks to buy and sell, and when to do so (timing the market)
Not an expert? Not a problem: You don’t need to be an expert on any individual company or sector in order to make an investment decision - if you think a particular country’s stock market or sector of the stock market will do well, you can easily invest in it and earn a reasonable return over the long run
Cons:
Broad based investment: The big market indices tend to be relatively stable because they are made up of the largest companies, which don’t tend to move dramatically under normal circumstances. You’d need to use a different approach if you wanted to invest in hand-picked smaller, but higher growth companies. That said, there has been an explosion of ETFs in recent years, offering investors the chance to gain exposure to very specific investment factors, market trends and sectors
Commitment: To really reap the benefits of passive investing, you’d typically need to keep your money invested for a minimum of 3-5 years, ideally even longer. It’s difficult to see your investment going sideways or even lower for a few months and avoid the temptation to cut your losses. It can also be tricky, say, if you need the cash for an emergency which forces you to sell your investment at a loss if you've only held it for a short period of time
It’s hard to beat the market when you are the market: This is because passive investing is used to 'benchmark' your performance against the market, so by definition this means investing in all companies within a particular market. So if you’re looking to outperform a particular index (market), you’ll likely need to use a different investment strategy!
Bonus points:
The ETF world has exploded over the past decade since the financial crisis - these days you can access a whole host of "smart" or "thematic" ETFs which allow you to invest in specific megatrends (Think the robots are taking over? There's an ETF for that. Think we'll run out of fresh water? There's an ETF for that. Think clean energy is the future? There's an ETF for that. All of these and more available on the Evarvest app upon launch!)
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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