Looking to make a little bit more without taking new risks? In challenging economic times, turning to a long-term investment strategy could be a sensible decision.
With UK GBP estimated to have fallen by 0.3%, production rates are slowing while Brits also battle inflation, facing prices almost 10% higher than they were a year ago.
If you’re thinking about reducing your trading activity and protecting your investments for the future, passive investing could be right for you. We’ve outlined everything you should know about choosing passive investing, including key benefits and drawbacks.
What is passive investing?
Passive investors prioritise long-term growth. Instead of trading regularly, passive investing centres around buying and holding investments in the hope that stocks should go up.
The most common approach to passive investing is buying an index fund whose holdings should mirror a segment of the market. Unlike other investment strategies, passive investment focuses on potential returns through long-term decisions, buying and selling as infrequently as possible.
Passive investing: Key aspects and benefits
The opposite of active investing, passive investing is comparatively low-risk.
Overall, passive investing refers to buying and holding with minimal market trading. Not only is it a cheaper option for investors, but it’s also less complex and can produce favourable after-tax results. Key features of this method include:
- Reduced risk: Based on their chosen funds, investors can diversify their holdings further
- Lower costs: With a slower approach, transaction costs are reduced
- Diversified holdings: Index funds distribute risk more widely
- Confidence: Passive investment relies on an optimistic view of the market
If you’re looking for a strategy that allows you to avoid the unexpected fees and performance dips associated with frequent trading, passive investing could be right for you.
Is passive investing safer in an unstable economy?
Recently, the market has been unstable. Not only does this indicate low confidence from investors in new governmental direction, but as the value of the pound plummets, both consumers and investors continue to be impacted.
Even though trading in GBP is effective and can be lucrative on the foreign exchange market, current instabilities have turned many investors away from actively buying and selling.
Drawbacks of passive investing
However, there are still some downsides to passive investment.
Index funds don’t rise and fall according to the state of the market. Your money will therefore follow the benchmark state of the index, so funds could still drop even if the market is performing well.
Furthermore, passive investing doesn’t offer as much flexibility as more active strategies might. It’s unlikely that you’ll be able to reduce the number of shares you own, even if your benchmark’s performance is falling.
Lastly, even though buying and holding can pay off hugely in the long term, you might be waiting at least a decade for any major returns.
With patience and confidence, passive investing evens out the risks for plentiful rewards.