Passive investing

What is passive investing?

Passive investing is a strategy in which investors try to replicate market performance rather than outperform it. Instead of actively selecting individual stocks or other investments, passive investors invest in index funds or exchange-traded funds (ETFs) that track the performance of a specific market index, such as the S&P 500.

You can think of it as a kind of "autopilot" for investing: You invest in a fund that mirrors the market, and your returns follow the overall market movements over time. No active stock picking or market timing is required-it's all about staying invested and giving the market time.

Key messages

• Long-term orientation: Passive investing focuses on steady market returns over a longer period of time rather than short-term gains.

• Index-oriented investing: Investors use funds that track a specific index, such as the S&P 500, rather than selecting individual stocks.

• Lower costs: As no active management is required, the fees are generally lower than for actively managed funds.

• Diversification: Index funds often contain a large number of securities, which spreads the risk.

• Objective: To achieve market returns without trying to outperform the market.  

How does passive investing work?

Passive investing focuses on the market as a whole rather than on individual companies. Investors buy shares in index funds or ETFs that contain a mix of assets that reflect the performance of a particular market index.

For example, when you invest in an S&P 500 index fund, you acquire shares in the 500 largest listed companies in the USA. The performance of the fund follows the fluctuations of these companies.  

Types of passive investing

1. Index funds: These funds track the performance of a specific market index such as the S&P 500 or NASDAQ.

2. ETFs (exchange-traded funds): Similar to index funds, but they are traded on the stock exchange like individual shares and offer more flexibility when buying and selling.

3. Target date funds: Funds that automatically adjust their asset allocation as a specific target date (e.g. retirement) approaches, thereby reducing risk.

Advantages of passive investing

• Lower costs: By dispensing with active management, the fees for passive funds are generally lower.

• Simplicity: This strategy is easy to understand and requires little time.

• Diversification: Passive funds often comprise a broad range of assets and thus significantly reduce risk.

• Long-term growth: Historically, passive investing has proven to be a solid strategy over long periods of time, as the market grows over the long term.

Disadvantages to be considered

• Market risk: As passive funds replicate the market, they are also exposed to market fluctuations. In a downturn, you lose just as much as the market.

• Limited flexibility: It is not possible to actively adjust investments to avoid losses or take advantage of opportunities.

• No excess return: Passive funds do not offer the possibility of beating the market; they merely aim to replicate it.

Frequently asked questions

1. how much money do I need to start passive investing?

There is no fixed minimum amount. Some ETFs and index funds can be purchased for the price of a single share, often for less than €100. However, the more you invest, the greater the potential for long-term growth.

2 How do I make money with passive investing?

Passive investing generates returns in two ways:

• Capital gains: Your investment grows when the value of the underlying assets increases.

• Dividends: Some index funds or ETFs pay dividends that can be reinvested to boost growth.

3. is passive investing safe?

Passive investing involves less risk than active stock picking, but market risk remains. In the long term, however, the market has historically shown growth, which is why passive investing is considered a sound strategy.

4 What is the difference between active and passive investing?

• Active investing: Selection of specific investments with the aim of outperforming the market, often by professional fund managers.

• Passive investing: Mapping market performance without trying to outperform.

5 How are passive funds taxed?

Passive funds are subject to the same tax rules as other investments. Capital gains and dividends may be subject to tax. However, passive funds are often more tax-efficient as there are fewer taxable events due to fewer reallocations.

Why choose passive investing?

Passive investing is ideal for investors looking for a low-cost, straightforward strategy to accumulate wealth over long periods of time. It offers a reliable way to diversify and take advantage of long-term market growth.