So what do I mean by passive investing. For me, it means that I don't stay awake at night thinking (and worrying) of ways I can beat the stock market and make millions of dollars or on the flip side, make sure that I don't gamble away all my hard earned money.
If you want to hear stories of why trying to beat the market is a waste of time, I would definitely recommend reading the book Wise Investing made Simple by Larry Swedroe.
The best definition for Passive Investing I have seen so far is: An investment strategy involving limited ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance.
Investopedia adds to this by saying, Passive Investing is also known as a buy-and-hold or couch potato strategy, passive investing requires good initial research, patience and a well diversified portfolio. Unlike active investors, passive investors buy a security and typically don't actively attempt to profit from short-term price fluctuations. Passive investors instead rely on their belief that in the long term the investment will be profitable.
Passive investment management makes no attempt to distinguish attractive from unattractive securities, or forecast securities prices, or time markets and market sectors. Passive managers invest in broad sectors of the market, called asset classes or indexes, and, like active investors, want to make a profit, but accept the average returns various asset classes produce. Passive investors make little or no use of the information active investors seek out. Instead, they allocate assets based upon empirical research delineating probable asset class risks and returns, diversify widely within and across asset classes, and maintain allocations long-term through periodic re-balancing of asset classes.
Where as, Active management might best be described as an attempt to apply human intelligence to find "good deals" in the financial markets. Active management is the predominant model for investment strategy today. Active managers try to pick attractive stocks, bonds, mutual funds, time when to move into or out of markets or market sectors, and place leveraged bets on the future direction of securities and markets with options, futures, and other derivatives. Their objective is to make a profit, and, often without intention, to do better than they would have done if they simply accepted average market returns. In pursuing their objectives, active managers search out information they believe to be valuable, and often develop complex or proprietary selection and trading systems. Active management encompasses hundreds of methods, and includes fundamental analysis, technical analysis, and macroeconomic analysis, all having in common an attempt to determine profitable future investment trends.
So, in order to reach your financial goals, slow and steady wins the race! Hopefully, my review of the book "The Quiet Millionaire" written by Brett Wilder, can shed more light on the various aspects of saving and investing wisely.
Do you agree with me on this ?
If yes, please leave a comment. If you don't, then I insist you leave a comment !
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6 comments:
Active investing can be very financially rewarding. It is a matter of knowing how to invest. I use options (especially stuff like spreads, strangles, and straddles, and I have been making money for the past 6 months. Maybe that is just a fluke, but I will keep at it as long as it is working for me.
Hello Anonymous, my question to you is, would you be trading options etc. with your kids education money or your retirement? Thats the point I'm trying to make.
You can aways keep some play money for yourself and do whatever you want with it.
Well, unfortunately with my retirement being in a Roth IRA, the government has decided that you cannot trade options in retirement accounts. As for kids education, I paid for my college education through loans and scholarships. What I learned out of it was financial responsibility. I will make my kids pay for their college as well. I may be generous and pay off their student loans as their graduation present. Lastly if you would like more information, go to www.personalfinanceresources.com It is my buddies website, but I have posted some there on options and good luck. Oh and Happy Thanksgiving.
To me, the principle of passive investing is 'you let the money working for you', but active investing is more on 'you work for the money'. Both are different and unique on its on way. Which one is the best? subject to individual knowledge, trading style and risk tolerance. While I love passive investing myself, but active investing is not that bad either. after all, many professional traders trade for a living!!
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Great site...I completely agree with your views on passive investing and your sites attempt to help folks save money. There have been many recent articles on the net about the high costs of 401(k) plans (which as you know, are usually filled with actively managed mutual funds). I wrote an article on my blog entitled "Buried Treasure in your 401(k)" which details an opportunity many of your visitors may be able to utilize to take more control of their plan and save a lot of money on operating expenses and invest their funds how they want...not just using the basic menu provided in their plan. I would love to hear your feedback about the article and the strategy detailed.
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