Passive investing is a strategy in which you put your money in one or more investment products and hold on instead of constantly trading them. This is done with the hope that the investment will increase in value over time or maintain its value while providing income through interest payments or dividends.
In general, people who do passive investing are after gradual growth. Passive investing is usually done for the long term, because giving more time lowers the chances that the investment will be greatly affected by the usual market fluctuations.
For this strategy, short-term gains and losses aren’t much of a concern, because it is based on the expectation that the market will go up in the future.
If you’re interested in doing passive investing, these are the basic steps:
Step 1 – Choose the right assets
These should be from different asset classes that are balanced across separate industries, because this diversification will help keep you from being too affected by events that negatively affect a single industry or asset class.
The assets you choose should have the potential to grow in value or generate income through interest or dividends, and must match your risk profile.
An easy way of doing this is by tracking an index (for example, the PSEi). By shaping your portfolio to follow the index’s composition, you will hopefully achieve the same performance. For the same end, you may also choose to invest in an index fund or an Exchange Traded Fund (ETF) that follows an index.
Step 2 – Keep calm and hold on
With passive investing, patience and confidence could be the keys to your success with this strategy.
Even if market changes cause the value of your investments to drop, you need to avoid the temptation to sell. After all, there will always be the chance that the value will go back to their previous levels or even higher, over time.
Step 3 – Continue with peso-cost averaging
Regularly adding money to your investments to achieve peso-cost averaging can be more effective at increasing your overall profit as compared to putting a large sum in once.
That’s because spreading your expense over a period of time may lower the risk that you bought when the price was high because of market fluctuations, so your chances of coming out on top are increased.
Peso-cost averaging is also easier on the pocket, so you don’t need a large amount of money to start with. What’s important is that you do it consistently and you reinvest the income from your investments.
