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Михаил Волков

Best passive investing strategy

There are many ways to accumulate wealth, but few are as reliable as the time-tested strategy of passively investing in stocks, bonds, and other assets that generate passive income in the form of dividends, interest, and rents. The passive investing strategy builds on the historical precedent that an inexpensive, well-diversified, low-turnover portfolio will tend to yield average market returns without much thought.


Passive investment strategy

Basically, a passive investing strategy requires the following:

  • Buying a solid collection of long-term companies across a variety of industries, market cap sectors, sizes, and even countries
  • Never sell these assets under virtually any circumstances, no matter how disastrous they may seem.
  • Buy more regularly by putting fresh money into your brokerage account and reinvesting your dividends.

Evidence shows that it works well in most circumstances because it protects investors from their own irrationality, reduces the need to understand fundamental analysis, and is almost time-consuming.

With the rise in popularity of investing in passive index funds as a low effort and low risk strategy, US passive index funds may soon outperform active US equity funds.


History

Many of today's investors are familiar with this concept because of John Bogle, founder of vanguard mutual funds, who has built his career helping investors save more of their money. Bogle first discovered the mathematical underpinnings of why this works so well during a research project he was doing as a senior lecturer at Princeton University.

This research led to his doctoral dissertation, which eventually emerged in the very first SP 500 Index Fund years later. By 2014, the Vanguard 500 Index he created had become the largest of its kind in the world.

It had over $ 190 billion in assets, had a turnover rate of just 3% (indicating an average stock holding for 33 years) and a mutual fund's expense ratio of 0.17%. Alone, it has provided a safe exit to passive income for more Americans than any other versatile individual financial product.


Connection with index funds

The passive strategy has always been around, but it seems to peak in popularity every few decades. The easiest way to take advantage of this strategy is to buy index funds and make regular incremental purchases using a practice known as the averaging method.

While the past is not a guarantee of the future, whenever an investor has followed this recipe and held on to an investment for 25 years or more, the results have been extremely profitable, despite some years of downside. However, for investors with significant funds, index funds are often a secondary choice.

As Bogle himself writes in many of his books, including a book titled Mutual Funds from a Common Sense Perspective: New Imperatives for the Smart Investor, it is much more tax-efficient for people with a few extra zeros at the end of their net worth to move away from mutual funds. funds and build a successful business.


No Index Funds Strategy

A great example of what such an action might look like is the ING Corporate Leaders Trust. Back in 1935, a portfolio manager set out to create a collection of 30 blue-chip dividend-paying stocks that would last forever.

Shares were only disposed of when they were purchased, went bankrupt, or suffered some other material event, such as a cancellation of dividends or a default on debt. Whether rain or shine, hell or flood, depression, recession, war, peace, inflation, deflation, and any other scenario imaginable, stocks remained intact. The portfolio paid dividends to owners that they spent, saved, reinvested, or donated to charity, and that was all.

This investment strategy, which is even more passive than an index fund, has crushed the average mutual fund over the past 79 years, delivering compound interest rates nearly double that of the competition.


Common misconceptions

One of the most serious objections you hear against a passive investing strategy has to do with bankruptcy - but it is far less risky than anticipated. When a portfolio is made up of quality companies, this rarely becomes a problem.

For example, ING Corporate Leaders Trust owned Eastman Kodak stock, which was worth nearly $ 0 before seeking protection in bankruptcy courts. Despite the fact that the final value of the company was about $ 0 per share, Eastman Kodak has still brought the trust holders a huge amount of money in the form of dividends over the decades.