The myth
Passive investing is called a hands-off approach because it involves buying assets to hold on over the long term. Passive investors typically make fewer trades compared to active investors who buy and sell more frequently.
Pooled funds are generally recommended for passive investors since these “baskets of investments” are managed by professionals who do the research and monitoring, so you won’t have to do them yourself.
If you want to put money in stocks as a passive investor, you may be told to stick to managed funds like index funds instead of buying individual stocks.
The reality
Picking individual stocks is typically seen as a hands-on method that’s better suited for active investors. This is because it can take a lot of work to do proper research when choosing a company to invest in.
Active investors must also keep track of the news and market changes to figure out which assets to buy and sell and when to do it. They tend to put in more effort to get potential returns that may outperform the market.
Beating the market means your investment returns are better than the performance of a certain benchmark, like a stock market index.
Most passive investors aim to track the market instead of beating it. This means they’ll try to get the same returns as an index or the broader market.
Some people believe there’s no need to pick individual stocks if you’re not aiming to outperform the market. They may think a pooled fund that follows an index will get the job done while requiring less effort.
An index-tracking pooled fund – like a Unit Investment Trust Fund (UITF), mutual fund or an exchange-traded fund (ETF) – might be a good match if you want to keep things simple and if it suits your goals and risk profile.
After all, it can be easier and more affordable to put money in a “basket” of top-performing companies instead of trying to pick out the best ones out of hundreds.
However, if you want a more personalized portfolio, buying individual stocks can still be an option. You may do so if you understand and can accept the potential risks, and if there’s a company you’re particularly interested in.
You may also have your eye on stocks with a good record of paying dividends, which could be especially useful if you’re investing for income.
Verdict: It depends.
Passive investing isn't limited to pooled funds, though picking individual assets may require more time, effort, and capital.
You can consider individual stocks as a passive investor if you believe they’ll be a good addition to your portfolio given your investor profile and long-term goals.
Mixing individual stocks with pooled funds could also do the trick. At the end of the day, what’s important is you understand where you are allocating your money.
