Passive investing

Passive investing means owning the market rather than trying to beat it. In practice, an investor holds a small number of low-cost index funds or ETFs covering broad markets, adds money regularly, rebalances occasionally, and otherwise leaves the portfolio alone. The approach rests on two observations: markets absorb widely available information quickly, which makes consistent outperformance hard, and costs compound just as returns do. Keeping fees, trading and taxes low is one of the few things an investor can reliably control.

Passive does not mean risk-free or effort-free. An index fund falls as far as its market in a crash, and the investor still has to choose an asset allocation, stick with it through downturns and resist the urge to sell near the bottom. Weighting by market capitalisation also means a passive investor holds more of whatever has risen most, which can concentrate the portfolio in a few large companies or one country. The word ‘passive’ is sometimes stretched to cover narrow thematic or factor funds that involve quite active choices.