Passive investments have been arousing more and more interest for some time. This is due to their main feature – they can bring long-term profits even with little commitment. However, what is worth knowing about passive investing, how does it differ from active investing and what form of capital investment is worth choosing?
What is passive investing?
Passive investing is a long-term approach to investing that aims to gradually create a profit over time. Passive investing allows you to increase profits in the long run primarily by reducing costs – for example, minimizing the number of transactions for buying and selling securities or other assets.
The strategy adopted by proponents of passive investment is often described with the words “buy and hold”. They do not want to profit from short-term market fluctuations – they prefer a variant in which they gain a position over time and then hold it for a longer period.
Active investing – what is it and how is it different from passive investing?
In order to fully consciously decide which type of capital investment is the optimal solution, it is also necessary to know the most important features of active investments. Unlike passive investments, active investing involves constantly buying and selling, for example, securities, which involves the need to constantly analyze the current situation.
The goal of active investing is to outperform the market. Investors choosing this form of capital investment take advantage of short-term market changes and fluctuations. If investors are actively holding securities that are starting to lose value, they usually decide to get rid of them as soon as possible. Active investors are also often interested in buying shares in actively managed funds.
Is it profitable to invest passively?
It is difficult to give a clear answer to this question – both active and passive investing have their advantages and disadvantages. Before deciding on the method of investing capital, it is therefore necessary to compare both forms. While the investor’s personal preferences often play a key role, knowing the pros and cons of passive investing – especially for novice investors – can prove extremely useful.
Advantages of passive investments
Among the biggest benefits in favor of passive investing are:
- Lower fees – passive investing is associated with lower fees, primarily due to lower transaction costs. In addition, in the case of passive investments, there is no need to incur expenses related to the ongoing analysis of the market situation and the selection of shares;
- Tax efficiency – When selling securities, all profits are taxed with capital gains tax. Due to the smaller number of transactions, passive investing is therefore more tax-efficient;
- Better long-term performance – Active investments can give you higher returns in a shorter period of time, but it is difficult to maintain such results over a longer period of time.
Disadvantages of passive investments
Like any solution – both in everyday life and in the world of investments – passive investing can also have some drawbacks. For some, the downside of this form of capital investment may be limited flexibility in action. Passive investors acquire assets and hold them regardless of the changing market situation. In addition, passive investments have lower potential returns – however, while actively managed funds can yield greater benefits, this also comes with increased risk.
Passive investing in real estate – why is it worth it?
The above-quoted definition of passive investing can be simplified a bit – passive investing is a form of obtaining income without the need for constant commitment of time and own work. In this case, the assets generate profits even when we are not working. Investments in rental real estate, from which you can earn passive income regularly and in the long term, fit perfectly into this definition.
Buying an investment property in order to obtain passive income is a solution that is becoming more and more popular among both entrepreneurs and individuals. It is worth emphasizing that it is an idea for a passive investment not only for people who have considerable savings.
People who have relatively little capital can consider, for example, an investment apartment by the sea. Such an investment requires a relatively small contribution compared to, for example, a large apartment in the city. In addition, such properties are usually characterized by lower maintenance costs, thanks to which the return on such an investment can be correspondingly higher.
This form of investment ensures that you receive financial benefits over a longer period of time – and this is due to taking only one investment action. The passive income generated in this way can thus be a constant source of income, even with little commitment. The funds obtained thanks to this can be used to support the household budget or further investments.