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What is passive investing?
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A small percentage of investors may have the skill, savvy and iron stomach to excel with short-term investments. But most people feel more comfortable with less risky, long-term investments. For such individuals, one strategy worth considering is passive investing.
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WHAT IS PASSIVE INVESTING? Passive investing utilizes a buyand-hold approach to gradually build wealth. Short-term fluctuations in stock prices do not affect passive investors, as one of the principles of passive investing is that markets will post positive results over time. So passive investors do not react with alarm when prices temporarily drop, even if they drop by a considerable margin.
that can serve as something akin to a safety net when the values of certain stocks or bonds within the portfolio dip. Though no investment strategy can claim it is free of risk, passive inWHAT IS AN INDEX FUND? vesting through a vehicle such as an Index funds are one of the most index fund can be a low-risk way to recognizable forms of passive invest- grow wealth over time. ing. The investment experts at Vanguard, the company that first started CRITICISMS OF PASSIVE INVESTING offering index funds, note that an The investment resource Investopeindex fund contains a preselected col- dia cites lack of flexibility and smaller lection of hundreds or even thousands potential returns as two significant of stocks or bonds or a combination drawbacks of passive investing. Pasof both. The theory behind this is that, sive investment funds are limited to a even if one stock or bond is performing predetermined set of investments that poorly, another within the portfolio is don’t often vary, if at all. That might doing well, thus minimizing losses and be not sit well with individuals who saving investors the time and effort of prefer a more active and flexible aptracking, as well as buying and selling, proach to investing. individual stocks or bonds. Big returns also are less likely with passive investment funds, as these DIVERSIFICATION AND funds are designed to track the marPASSIVE INVESTING ket, not beat it by a wide margin. InConventional investment wisdom dividuals with long-term investment has long touted the benefits of di- strategies likely won’t be turned off by versification when investing. When this, though those looking for bigger investors put all of their eggs in one rewards (which, notably, carry bigger basket, they could then lose all of their risk) may be underwhelmed by the reinvestments if the value of that invest- turns on passive funds. ment goes south. As previously noted, Passive investing is a sound investindex funds include a collection of ment strategy for individuals who stocks, bonds or both, thus providing want to grow their wealth over the investors with sufficient diversification long haul. MM22C519
Tax Planning & Preparation Individual Estate and Trust Sole Proprietorship LLC and Corporations Charles R. Gebeck, Enrolled Agent GEBECK & ASSOCIATES, INC. 15 W. Warren Street, Suite 1 • Princeton, IL 61356
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