Passive investing is an investment strategy used since the early 1970s with its roots in academic research. Passive investing is opposed to active investing in the sense that it does not aim to beat the market by selecting specific stocks offering potential higher returns or by trying to time the market.
Instead, the passive investor invests in the market as a whole through a very diversified basket of securities as it believes it is impossible to predict accurately and repeatedly which stock will beat the market in a given year. Likewise, the passive investor tends to buy and hold long-term securities in which he invests, even during a crisis, because he thinks it is impossible to predict the "right" time to buy or sell securities.
This investment approach most often uses index tracking funds (ETFs or Exchange Trade Funds). The costs of passive investing are generally lower than those of investing actively as a passive fund minimizes management costs (there is no need to have an employee in the fund who analyzes stocks in the market and tries to predict which will do better this year, the fund simply buys all shares of the market) and transactions (securities are bought and kept for a longer period than in an active strategy).
Last updated on 22/12/2015