Today’s post is not about making money. Money is a tool that everyone uses on a day to day basis for basic necessities and wants. Today I am talking about wealth, real wealth, and how to achieve it in the simplest and laziest of ways: passive investing.
What is passive investing
Passive investing is the type of investing I mentioned yesterday when I talked about “setting and forgetting” my accounts. It means you are taking a passive approach to investing. You aren’t trying to time the market, you aren’t day trading, you aren’t caring about the hot stock tip you heard about at a dinner party. You are sitting back and relaxing with a low cost index fund, watching your wealth grow exponentially over time. The market has historically returned an average of 8% . While average is not normal (I love that post) it is a good bet that the trend will continue over time.
A passive investor will employ the following techniques:
- Buying index or lifecycle funds and holding them for an extended period of time
- Regularly contributes to their portfolio
- Reinvests dividends to give their portfolio an extra boost in the game of compounding
- Doesn’t worry about daily market fluctuations
Why is passive better than active investing.
Active investors are people that trade and turnover stocks quickly for a profit. This can be done with some success but that doesn’t mean everyone will be successful. Buying and selling funds or stocks carries hefty commissions and capital gains tax implications. An active investor can spend all week researching, buying and selling their stock and making a decent return on their investment. However, that return is whittled away by commissions and taxes.
Timing is a major factor in active investing that one doesn’t have to worry about with passive investing. For example, if you are a new investor and started to day trade last week, you probably lost 5-10% of your money in just a few days. However, if you started to invest this week you would be up 5-10% . Would you like to bet your wealth and livelihood on a method as fickle as this? It’s surely not a strategy for me.
Want others are saying?
Over fifteen years to 1998, on a pre-tax basis the Vanguard S&P 500 index fund outperformed 94% of general equity mutual funds and 97% on a post-tax basis. The post-tax average difference in annual performance was 4.2% .~ From Common Sense on Mutual Funds, by John Bogle
Research supporting passive management comes from the nation’s universities and privately funded research centers, not from Wall Street firms, powerful banks, insurance companies, active managers, and other groups with a vested interest in the huge profits available from active management.
The results from this research are very clear: Active investment management is an appealing mirage which substantially boosts costs and decreases returns compared to properly designed passive portfolios. Research employed in the development of passive and index investment strategy has shown that. ~ From Evanson Asset Management
What if I don’t have money to invest?
Do not despair if you don’t have any money to invest. Today’s post is not about how to invest in the Marley today. It’s about how to build wealth over time whenever you are ready to begin. However, saying you don’t have money to invest vs actually not having money to invest are two different stories. I know a lot of people that don’t make a lot of money but could afford to put $50 a month into the market. Starting off small is not a problem, as your income grows so will the amount you invest. Starting is the most important part. Once you make that commitment to add money to your investments and passively let them grow over time, you are on the path towards creating true wealth, not just money.
I urge the average investor saving for long-term goals to become a passive investor. Passive investing is a way to build wealth. If you are looking to make money, and have the extra money to play around with, feel free to dabble in the market and become an active investor. Look at this type of investing as a hobby, not as a way to provide for your family and your future.
Some Great Links that I have learned from or have made me think differently with regards to investing:
12 Investing Mistakes I’ve Made (and How You Can Learn From Them) – From Moolanomy (Guest Post on GRS)
Do you have an Investing Exit Strategy? – From Mrs. Micah
Index Funds are still the best way to buy stocks – From the Examiner