SMART MONEY DIARY
Passive Investing Means
Passive Investing Explained
Passive investing is about buying and holding assets for a long period of time without trying to time the market. Main investment focus is on cost-effective exchange-traded funds (ETF) that replicate a broad market index such as the MSCI World or the FTSE All-World, bond ETFs, and commodity ETCs.
Who does not dream of enjoying life, having a job which provides joy and decent income and retiring as a self-made millionaire? Remember that at a compound rate of 7%, your investment will double roughly every ten years. Since 1987, the MSCI World index has generated an annualised gross return of 8% p.a. (see illustration below). As a result, the earlier you begin, the greater your prospects of accumulating significant wealth.
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The goal should not be to become overly greedy and try to get a 20% or more return on investment per year - this would necessitate highly-concentrated bets on very volatile assets, with a significant chance of not selecting the proper ones. This can result in irreversible high losses.
Therefore, a passive investor should expect an average of 7-8% p.a. before taxes and fees, which was previously feasible with globally diversified portfolios (see graph below).
Passive Investing Does Not Mean Hunting Excessive Return
MSCI Indices - Gross Returns in % - as of November 2022
Source: MSCI.com - Factsheet Nov 2022
Passive Investing Is Very Simple and Requires Little Maintenance Efforts
Setting-up a portfolio of passive investment instruments (e.g., exchange-traded funds) and regularly injecting cash via a saving plan is not rocket science (see here). The major challenge will always be to maintain discipline in saving and holding for a very long period - regardless of how markets develop and what noise (forecasts, recommendations, etc.) market commentators create. Who would not be hesitant to invest money into a market that is down 20% YTD?
“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
Warren Buffet
Successful Passive Investing Is Mainly about Keeping Discipline
Is passive investing really effortless? Well, during stormy markets, you have to maintain your discipline and resist your temptation to time the market or to suffer while looking at your brokerage account, which might show temporary losses on paper.
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Two crucial scientific discoveries that help you become a better investor:
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trade less - lowers transaction costs - by the way, according to Fidelity the best private investors are those who are dead and no longer active investors
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avoid market timing - no one knows what the future holds
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Enough reasons to become a successful passive investor? Then, in very simply 5-steps, learn how to set up a successful passive investing portfolio based on low-cost exchange-traded funds (ETFs).