Table of Contents
What is a passive investing strategy?
Key characteristics of passive investing strategies
Types of passive investing strategies
Potential advantages of passive investing
Potential drawbacks of passive investing
Passive vs. active investing
The bottom line
Sep 9, 2022
5 min read
Passive investors use a strategy that’s relatively simple. Passive investing’s core principle is that, over time, the market’s rise will provide gains for those who wait.
Passive investing is a strategy for building wealth over the long term. It has emerged as a popular way “to compound your wealth without really making any decisions yourself,” says Christopher Seifel, a Titan investment manager. “The way that you can think about it is almost like a coffee-can portfolio, where you invest money and you come back in 30 years and your wealth is compounded.” For those who feel time is on their side—that is, they’ve got several years to buy and hold an investment—passive investing can be a strategy to increase their capital.
balanced across many asset classes, industries, market capitalization sizes, and sectors. A few examples of passive investments include real estate, peer-to-peer loans, and funds that track an index, such as an exchange-traded fund (ETF). After buying these assets, the investor typically doesn’t sell them, even during times of market turmoil. The investor holds the assets and regularly reinvests in them.
Instead of trying to outperform the market, passive investors believe that minimizing buying and selling will lead to greater long-term returns. They have faith that although the stock market experiences highs and lows, it generally rises over the long term.
This strategy can help minimize the mistakes investors make when they react emotionally to sudden moves in the stock market. It also requires little work and is typically cheaper than active investing, because passively managed funds usually have lower expense ratios and generate fewer trading fees.
The goal of passive investing is to slowly build wealth over time instead of pursuing shorter-term gains. The key characteristics of this strategy include:
Passive investors believe that, despite highs and lows, the market rises over time. Therefore, investors who use this strategy believe they can count on steady market gains.
Passive investors don’t engage in frequent buying and selling, which minimizes trading fees and other investment costs. Passive funds also tend to have lower expense ratios than actively managed funds. The average expense ratio across all passive funds was 0.12% in 2020, according to Morningstar data, compared to 0.62% for active funds.
Passive investors tend to diversify their holdings by buying index funds or adding several types of long-term investments to their portfolios.
All investing involves risk, but diversification can help spread risk. Even if one asset in an individual’s fund declines, it shouldn’t affect their entire portfolio.
There are several ways to approach passive investing.
Index fund ETF or mutual funds are often a go-to for passive investors because they contain a mix of assets and carry lower costs. These are popular options because they’re often diversified across asset classes, industries, market capitalization sizes, and sectors. After buying a fund, the investor typically holds onto it for the long term, even during market lows, and will regularly put more money into the investment to help it grow.
One could buy an investment property, collect rent, and sell later for a profit.
These are little more than computer programs that manage an investor’s assets. Although most robo-advisors let investors establish a risk profile, humans play almost no role in selecting which assets to buy. The goal is to match the market while minimizing costs.
These features of passive investing may attract investors:
Passively managed funds require less research and fewer trades, so they usually minimize fees and have lower expense ratios.
When a passive investment follows an underlying index, it’s clear which assets an individual’s investing in.
Passive funds trade less often, generating fewer capital-gains payouts that can increase tax bills.
Investors can buy and hold an index or set of indexes, which is simpler than constantly researching and trading assets.
The passive investing strategy does have drawbacks and limitations:
Passive investors often buy and hold a specific index or asset, no matter what’s happening in the market. This provides fewer options unless the investor decides to look into other offerings.
Passive investments track the market, so by definition they likely won’t outperform the market.
Passive investments are typically under the control of fund managers, so there’s little room for customization and flexibility.
Generally speaking, the goal of active investing is to beat the market, while passive investors try to mirror what the market is doing. Active investors select the assets they’ll buy or sell, whereas a passive investor farms out the asset-selection process to someone else. The passive strategy often works, too. According to a 2021 Morningstar report, only a quarter of active funds outperformed their passive counterparts over a 10-year period. And in some categories, not a single active fund beat out a passive one. Both strategies may offer benefits in the right circumstances, though.
Consider some of the main differences between passive and active investing:
The biggest difference between the two investment strategies is the level of effort involved. An active investment strategy requires a hands-on approach—investors can either manage their own assets or outsource the job to a portfolio manager, who often seeks investor input in buy and sell decisions. Passive investing involves less buying and selling, and these investors often buy index funds or a similar type of investment. Whenever the underlying index makes a change, the fund that tracks the index automatically alters its holdings.
Passive investors focus on long-term trends and on diversifying their assets, trusting that any losses will be offset by rising valuations over time. On the other hand, some active investors trade in an attempt to time the market.
Passive investing’s core principle is that, over time, the market’s rise will provide gains for those who wait. Passive investments also tend to outperform their active counterparts over the long term. Of course, investors don’t have to funnel 100% of their funds into passive investments and many use a combination of passive and active strategies.
Side note: if you're curious about how compounding could potentially affect your investment returns over a period of time, check out Titan's Compound Interest Calculator.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
What Is Passive Real Estate Investing & How Does It Work?
Passive real estate investing is a hands-off approach that can help diversify a portfolio. There are several ways to invest in this asset class, learn more about it.
What Is Passive Investing and How Does It Work?
Passive investing is a strategy that can help people build wealth over the long term. Investors have faith that, over time, the market’s rise will provide gains.
© Copyright 2023 Titan Global Capital Management USA LLC. All Rights Reserved.
Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.
Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.
The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.
Cryptocurrency advisory services are provided by Titan. Cryptocurrency trading is provided by Bakkt Crypto Solutions LLC ("Bakkt Crypto"). Bakkt Crypto is not a registered broker-dealer or a member of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Bakkt Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency execution services are provided by Bakkt Crypto (NMLS ID 1828849) through a software licensing agreement between Bakkt Crypto and Titan. Please ensure that you fully understand the risks involved before trading: bakkt.com/disclosures.
Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
Contact Titan at firstname.lastname@example.org. 508 LaGuardia Place NY, NY 10012.