For a low-risk, high-reward solution to retirement planning that will stand the test of time, few options better appeal to the everyday investor than passive investing.
Passive investing refers to any investment opportunity that does away with the stressors of active portfolio and asset management to allow investors to maximise their returns while minimising their commitment of time and effort. Passive investment strategies avoid fees and costs associated with more active investment portfolios while ensuring that market fluctuations and trends are rarely a concern.
Many investors rely on passive investment to add stability to new and existing portfolios. As with any investment decision, however, you need to fully consider the risks and rewards involved to determine if it's the right course of action for your financial future.
At Concept Capital Group, we pride ourselves on our commitment to ethical investment that benefits all parties involved. That’s why we’ve put together a detailed breakdown of passive investing and the value it can bring to your portfolio.
There are a range of financial and administrative benefits to introducing passive investments to your portfolio. These include:
Without the need for a portfolio manager or financial advisor, passive investing invites fewer administrative costs than active investing. Any upfront and maintenance fees are typically lower as well. For example, Barclays Bank suggests that investors often pay annual charges of around 0.75% per year for actively managed funds, whereas certain passive funds charge less than 0.1% per year.
With actively managed funds and assets, there's a chance that certain pieces of information may be at the discretion of portfolio managers seeking to maintain a competitive advantage. The index funds for passive investments are always exactly what they appear to be, with nothing withheld from the investor, regardless of their experience or position.
Since they're traditionally held for long periods, passive investments have reduced trading volumes compared to active investments. This allows them to avoid accruing large amounts of capital gains tax.
Passive indexes are easier to manage as they avoid the need for research and reactivity required by active investment strategies.
On average, long-term passive investments outperform their active counterparts. A 2022 S&P Indices Versus Active (SPIVA) report from S&P Dow Jones Indices showed that most actively managed funds in international equities underperformed at rates of 68%, 71% and 74% in the Global, International and Emerging Market categories.
Passive investments invite less risk than active ones due to the broader range of assets and industries. Through passive investment, you can easily oversee hundreds of assets and bonds at once, significantly diversifying your portfolio and safeguarding against the poor performance of a single stock or asset.
Although passive investing is generally considered a safe alternative to active investing, certain risk factors should be taken into account. When making an active investment, be sure to keep the following potential drawbacks in mind:
When passive investing in an index or exchange-traded fund, you lose the ability to individually pick each investment or dispose of underperforming assets. Your passive funds are limited to a specific, predetermined set of indices.
How can I fix this?
One solution for this drawback is combining passive investments across several industries and sectors, allowing for portfolio diversification that counteracts underperformance and restrictive individual asset types.
While passive funds outperform active investments in the long term, their 'slow and steady' approach means they will rarely see the massive returns that make active investing appealing. For some, the consistency of a passive investment pales in comparison to the thrill of 'beating the market' with a well-placed active investment.
How can I fix this?
There's no way to make passive investing generate the same windfalls as active investing in the short term. Part of the trade-off between active and passive investing is that the former takes on more risk for potentially greater rewards. The reliability and relative security of a passive investment can make its lesser immediate returns a small price to pay for comfort. A combination of passive and active investments can give more experienced investors the best of both worlds.
Although the hands-off nature of passive investing can be a charm point, it can also encourage investors to disconnect from their portfolio entirely under the mistaken belief that they don't need to do anything to turn a profit. This leaves them vulnerable to the same risks as active investment portfolios over time, such as market fluctuations and tax liability.
How can I fix this?
You may not need to manage your portfolio as routinely when passive investing, but you should still take the time to monitor your investments and regulation changes when you can. Doing so will ensure that there are no nasty surprises on the horizon.
It is entirely possible to achieve financial independence through a passive investment strategy. Passive investing may have a lower risk and cost than active investing, but they also have great potential for growing your retirement investment portfolio over time, especially if you make an early start.
Financial independence is a largely subjective term, however. For some, it can simply mean living debt-free without relying on an active income. For others, it may include having enough savings to afford regular travel and leisure activities or settling in an entirely different country post-retirement.
Ultimately, achieving financial independence is the sum of a multitude of factors of which passive investment is just one. You may also need to monitor your expenses and seek other opportunities to generate wealth to meet your financial needs.
At Concept Capital Group, we offer our clients passive investment opportunities in affordable social housing that are made accessible through a low upfront cost. Our buy-to-let properties are tailored to low-income tenants in need of housing that meets their needs without compromising on quality or exceeding their price range. When investing with us, you're diversifying your portfolio through a low-risk, tangible asset and providing local communities with the secure, reliable housing needed to better the lives of their most vulnerable people.
To find out more about passive investing, contact us today for an initial consultation.