Investology

Understanding Passive Investing

There are many methods and strategies in investing. Each one has its advantages and disadvantages. It depends on the investor what type of investing method to use based on his own experience and preference. Among the many strategies available, all can sometimes be summed up into either active or passive investing. For now, we will be looking into trying to understand more about the basics of passive investing.

What Is It?

Passive investing is a type of investing method that employs the strategy of buying and holding investments for long periods. It is opposite to active investing which requires investors to constantly buy and sell securities to obtain profits. In the case of passive investing, investors need only to choose and buy certain securities that they believe offer long-term growth. The investors then hold on to these investments until such time that the investor may need to cash in on the profits or move on to other more attractive investment opportunities.

Passive Investing Advantages

One of the advantages of passive investing is that it requires relatively lower costs to achieve higher profits. Since investors need not spend too much of their time or money on frequent trading of their investments. If an actively traded investment earns the same profit as a passive investment, the latter earn higher by way of lesser management fees and trading commissions due to fewer or no trading activity.

Passive investments also minimize mistakes as a result of bad trading decisions. Actively traded investments always undergo several trading decisions that put them on a risky situation. Sometimes the decision may be a mistake and cause investors to lose out on investments. With passive investment, investors choose an ideal security to bet on and hold that position as the security achieves a value increase. Decisions are lessened and the risks minimized.

Passive Investing Disadvantages

One of the disadvantages of passive investing is that the investor may suffer automatic losses on positions when the market is on a downswing. Investors may not be able to escape the losses since they do not actively follow frequent changes in the market. Another disadvantage is that passive investors may miss out on good investment opportunities along the way if they plan to buy and hold on to chosen investments. There may be opportunities on the short-term that active investors will take and greatly profit from. Many passive investors miss out on these opportunities.
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Tags: Investing, Passive, Understanding