Passive investing is the act of investing automatically in an index fund or ETF. There are multiple things you need to arrange before you are able to enjoy the benefits of passive investing. These include things like picking the right asset allocation, joining a broker with low costs and sorting out how much money you have available to invest periodically. Once you’ve done these things passive investing can be great!
Here are the main 5 reasons why passive investing is so good
1. Less stress
Because of the fact that you’ll be investing automatically under a passive investing strategy, you won’t be burdened with hard and stressful choices. Choices about the right time to invest, what to invest in and whether you made the right call or not are none of your concern. Investing automatically means you will buy at some low points and at some high points, resulting in a decent return over the years. This without having to sacrifice nights of sleep.
2. Set it and Forget it!
That’s probably one of the mantras that suits passive investing the most. You only put in a couple of hours of work initially, picking the right investments and broker. Once every year you rebalance your portfolio to secure some gains (some companies offer to do that for you, such as Vanguard) but that’s all.
Active investing however, requires you to do daily research which costs a lot of time and can be stressful. It must be said that if you are a good active investor, you can make a lot more money. However, many investors overestimate their own capabilities. The result is that they lose more time and money with active investing compared to passive investors.
3. Focus your time and energy on other passions or wealth building activities
Another benefit is that because you spend less time on investing, you can put your most valuable resource, your time, into other passions or wealth building activities. This way you can really leverage your wealth. The concept of making money work for you instead of you working for your money is what passive investing is really about.
4. Less possibilities to make dumb decisions
Another huge benefit of passive investing is that investors have less possibilities to make dumb decisions. Many investors overestimate their capabilities and are overconfident about investments they make, often resulting in a loss of money.
5. Steady returns
Investing into a broad index such as the S&P 500 produces relatively steady returns over a long period of time. Steady returns, in this case, mean that on average, the S&P500 has returned 7% profit. It has returned this for a period of more than 60 years! This 7% return annually is what you can expect if you are passive investing for the long term.
With passive investing you accept the fact that money can work for you instead of having to work for money. That is one of the fundamentals of building wealth. You have more time available for other things while still beating a lot of active investors. Only if you really enjoy investing or want to make a career out of it, I would advise you to become an active investor. If this is not the case then relax and enjoy the slow but steady and secure ride!