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Passive Investment Strategy

There are various forms of investment available to those who have capital to spare. Those in the field often categorise investment or active or passive – here, we discuss passive investment, and understand what an effective passive investment strategy. You will also learn some useful tips to improve your passive investment strategy, if you plan to put money into this kind of investment.

Passive Investment Defined

What is passive investment? Often called a ‘buy and hold’ strategy, and even a ‘couch potato’ strategy, there is little trading involved in this type of investment. Returns generally come in on a long-term basis, and the investment itself does not require continuous monitoring. There is much less risk involved in passive investment than in other forms of investing.

Essentially, the foundation of passive investment is the belief that in general, over a period of time, movements in the stock market tend to be upward ones. So passive investment means carefully taking advantage of this market tendency – caution can prove to be very profitable in this form of investment.

What is the difference between passive and active investment?

Active investment takes advantage of short-term fluctuations in the market, buying when prices are low, and selling when they are high. Passive investment, on the other hand, is less risky, and the goal here is a long-term return on your investment.

The Benefits of Passive Investment

Going in for passive investment has many benefits – one major advantage of this type of investment is that transaction costs are kept low because of minimal movement in the portfolio.

Equally advantageously, passive investment involves much less risk than other forms of investment.

In passive investment, the investment manager makes very few changes in the portfolio. So the effort involved, and the time spent attending to investments, are minimal.

There are tax benefits that come with passive investment. For instance, the incidence of capital gains tax will be far less when you are engaged in passive investment.

Passive investment is particularly useful when an investor is building up a retirement fund.

Passive Investment Strategies

Passive investment is significantly more profitable when effective strategies are applied. Let us examine some of these strategies.

An important aspect of passive investment strategy is research. The investment opportunity should be studied carefully to ensure that the chances of profitability in the long run are as high as possible.

Patience is truly a virtue when it comes to passive investment. Returns are long-term, and it is when assets are held until the right time that the benefits of passive investment are felt significantly. Taking advantage of short-term price fluctuations is not a part of an effective passive investment strategy.

Including mutual funds in your investment portfolio is an effective passive investment strategy. These will help diversify, stabilise and balance out your portfolio. A good passive investment portfolio would include a combination of bonds with varied maturity dates, stocks and bonds with varying degrees of risk and equities of various types.

A passive investment portfolio can also be indexed to good effect. This is done by replicating an important, recognised index of investments, such as NASDAQ, in a similar proportion. Generally this kind of strategy is used with equities.

Another effective idea when it comes to passive investment strategy is reinvesting dividends.

While passive investment is usually done with equities, hedge funds, commodities, mutual funds and bonds are also profitable avenues for this type of investment. So specific strategies have to be applied for each form of passive investment – for instance, it is well worth studying hedge fund investment strategies if you are planning to go in for passive investment in a hedge fund.

Economic Principles to Base Your Passive Investment Strategy On

Passive investment comes with a rationale based on principles of financial economics. Some of these concepts are:

  • Over a period of time, on average, an investor’s portfolio performance will generally match the market average, if transaction costs are not taken into account. So it makes sense to keep transaction costs as low as possible, and this creates an ideal passive investment scenario.
  • The efficient market hypothesis, where prices of a market in equilibrium are considered to be an accurate basis on which to plan a passive investment strategy.
  • The CAPM or Capital Asset Pricing Model is also based on the market – many believe that following this model is an effective way of enhancing returns on a passive investment.

Get Help with Your Passive Investment Plan

If you are new to passive investment, and need advice in this area, you would do well to seek online assistance. Venturegiant.com, one of the best platforms for the interaction of entrepreneurs and investors, offers excellent advice in various aspects of investment, including passive investment. So if you want to get free passive investment strategy advice from experienced professionals in the field, visit venturegiant.com. You’ll find the suggestions offered here very useful when you want to formulate a passive investment strategy.