5 Questions and Answers on “Passive” Investing

What is Passive Investing?

Passive investing is an investment strategy that aims to maximize returns in the long run by keeping the amount of buying and selling to a minimum. The idea is to avoid the fees and the drag on performance that potentially occur from frequent trading.

Passive investing is not aimed at making quick gains or at getting rich with one great bet, but rather on building slow, steady wealth over time.

Below are few commonly asked questions regarding passive investing:

1. Is Passive investing recommended?

The pros and cons of Passive investing can be pin-pointed briefly in the below manner: 

Pros:

• The annual charges are low
• The procedure and results are more simple 
• Inclines towards a long-term approach towards profits 
• Predictability of returns exists
• More tax-efficient
• Simplicity: investors know what they are getting

Cons:  

• Unlikely to outperform index
• Participate in all of index downside
• Buy/sell decisions based on index, not research

2. What are the implications of passive investing compared to active investing?

Passive investing cannot be applied for the majority of shares as most of the liquid markets are created through active investors. 

3. How are stock prices affected through passive investments?

The buy-and-hold nature of passive investments dictates that, unlike active investments, they do not add and remove stocks based on estimations of securities' undervalued or overvalued status.

4. How can one better invest in indices, other than by way of buying stocks in proportion to their market capitalisations? 

Deviating from the global market, cap weight is a smart choice if active investing is done in a low fee and tax efficient manner. Passive investing can be easily disguised today where anything can be ‘Indiced’ as passive investing. Therefore the heed to terminology and its new age developing strategies must be prioritized while understanding investment and nature of indices. 

Also, as discussed in the famous Forbes magazine, an equally weighted index can provide investors with much more diversified stock market exposure. 

5. How are ETF’s and their popularity justified? 

ETFs can be a misleading concept in finance when it comes to defining liquidity for the investor. The daily updates of a 5-year maturity plan can be confusing in giving a status statement which might end up feeling as if it were riskier than it actually is. 

Cedrus is here to understand our client’s needs and help them decide whether the active or passive investment will be more beneficial for them. Understanding its effects for different scenarios and instruments is important for decisions regarding how you invest your money for which our services are just a call away.

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