Passive Investing: A No-Brainer

There has been a war raging since the beginning of the investment world.  This war is between an outspoken powerhouse and an underdog.  I’m speaking of the war between active and passive investment strategies.  I’m here to tell you that passive investing is the better way to go.  Before I get into the reasons why passive investing is the clear winner, let me explain the difference between the two. Active = Bad Active investing is an investment strategy that believes in beating the average returns of the stock market.  This type of investing is done by buying and selling through brokers.  Investors attempt this strategy by speculating, buying under priced stocks, or timing the market.  I would strongly urge anyone to avoid these strategies.  To me, these are nothing more than “white collar gambling.” Passive = Good Passive investing is on the other side of the pendulum in terms of investment philosophy .  A passive investor is typically investing for the long term and is looking to match the average returns of the market, not beat the market.  Instead of buying individual stocks like an active investor, a passive investor will use investment vehicles like index funds or ETF’s to achieve a broad asset allocation.  This is the most proven way to retire comfortably and protect your hard earned money. In reality, it comes down to your individual situation.  If you are trying to make short term gains, of course passive investing is not going to be your number one choice.  But if you are an average American who is simply trying to retire, passive investing is your best bet.  Let’s go into why passive investing is the clear winner for the average person. Less Stress = Better Life This is easily the number one reason to choose passive investing over active investing.  I don’t know about you but I HATE stress.  It’s stressful following the market every day and tracking gains and losses.  With passive investing, you pretty much have a stress free investment strategy.  You simply choose a couple broad based funds and you’re off and rolling.  I haven’t even checked the stock market the last three months.  It feels great to know that your money is tracking the market and not taking unnecessary risk. Understanding Made Easy Passive investing makes it simple for the average investor.  You won’t have to track performances of individual stocks or look into their balance sheets.  Passive investing offers a clear and concise solution to investing.  You know what companies are in each of your funds and can easily adjust asset allocation depending on your retirement timeline. Low Costs No one wants to pay more than they have to for management fees.  Costs are one of the few areas of investing that the individual has complete control over.  A high management fee is going to deplete returns versus a smaller management fee.  You’d be surprised at how an expense ratio can make or break your investment portfolio.  Because passive funds don’t have active managers, expense ratios as low as 0.1% are common place.  Studies agree with these conclusions.  Higher management costs do not guarantee higher returns. Tax Efficiency Is King Raise your hand if you want to pay more taxes on your returns.  Yah, I didn’t think so.  The government has already taxed you multiple times, why give them more money?  Did you know that the average turn over rate for actively managed funds is around 90%?  This means that you have a much higher tax liability when investing through actively managed funds.  Typical index funds have turn-over rates around 5%, much much lower.  This ensures that you keep more of your money. Amazing Long-Term Performance Did you know that roughly 85% of actively managed funds fail to beat the market over the long haul?  Yet another reason to choose passive investing for your retirement accounts.  A small percentage of managers will make consistent gains over time, but the odds are against you.  We simply don’t have the insider information it takes to beat these managers.  It’s a much wiser choice to follow the math and stick with passive investing.  Because one’s money is spread out across multiple assets classes like REIT’s and large cap stocks, you will be tracking the market average and will see gains over the long haul.  It really is the better investment strategy. Are You Convinced? I don’t know about you but I want to be a wise steward of what God has given me.  I don’t want to take unnecessary risk.  In my opinion, passive investing is the clear winner for the average investor.  Who has time to track stocks during the day?  I know I don’t. Let me know what you think readers!  Do you agree with my conclusions?  Have you had success with active investing?  Comment below with your thoughts! Related Articles: Active Vs. Passive Funds | Understanding the Key Differences Index Funds, Mutual Funds, & ETFs Defined What Is The Best Investment For My Money During These Economic Times? 5 Things You Must Know Before You Start Investing Christian stock investing: How to be Biblically responsible 3 keys to safe and successful investing Jon is a Christian personal finance writer at Free Money Wisdom . His mission is to help you succeed in your personal finance life with the Bible as your compass. When Jon is not writing on personal finance, he spends time with his girlfriend, lifts iron at the gym, and plays Scrabble. You can subscribe to his site through EMAIL / RSS or you can also find him on Twitter and Facebook . The articles on this site are for entertainment purposes and should not be taken as financial advice. Please contact a financial professional for specific advice regarding your situation. Also, many of the CPF articles help us pay the bills by using affiliate relationships with Amazon, Google, eBay and others. Find out more here .

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Passive Investing: A No-Brainer

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