What Is Passive Investing?
In most instances, when people hear of the word passive investing, the first thing that comes into their minds is real estate. Yet, anyone who has owned an apartment or rental home knows that there is no such thing. It is because part of this investment includes collecting rent, doing repairs, paying taxes and so forth. And all this requires work. It is then common to think that it is really vital to be hands-on when it comes to retirement investment.
So what basically is the true meaning of passive investing?
Number 1. Owning markets - when talking about stock price, a passive investor isn't bothered with the performance of a particular company over the other. Say that it's a well capitalized company and represented in broad index at the same time, the secret is to own it and all its peers.
Number 2. Own asset classes - there are many people who fixate on stock market but, a powerful portfolio contains private and public bonds, foreign equities, foreign debt and real estate. As you are doing comparison of your gains, it isn't the same thing as owning stocks even for a long period of time.
Number 3. Rebalancing - selling high and buying low as trading dictum goes. Yet, that is almost impossible to do consistently. Most of the time, the big wins are cancelled by losses, which leaves the small investors and 8 out of 10 big investors behind the market get average. Instead, sell gainers since they rise and use money to buy back decliners. Over stock market alone, rebalancing helps a lot in gaining an additional 1.5 percent.
Number 4. Avoid emotions - risky is somewhat an interesting and funny word. This implies danger except for your investing circle to which it means rewards. The key is taking the right type of risk such as owning stocks as you are avoiding the wrong kind similar to panicking and then selling out when the market loses ground.
Number 5. Compounding - do you have to sell your investments at the right time? Not if you rebalance and shift your portfolio steadily and gradually to a more conservative holding as you're aging. Cashing in markets is not a good timing instead, it is more like a sign of panic and a sign that you should not be investing at all.
Anyone can become a successful passive investor. In fact, so long as a passive investor has a reasonable goals and right mindset, he or she can't help it but to succeed. Retiring on the right moment is additionally a reasonable goal and it is something you can achieve.
Cited reference: his explanation