The Case For Passive Investing
We people are curious creatures: we work really hard for passive income and to live a life we want when we’re 40, 50, or 60 years old.
But then we tend to forgo (or forget about) passive investing – which allows us to grow our money now, doesn’t get in the way of pursuing other goals, and still allows us to live our lives now, not decades from now.
Take cost averaging. It’s a simple and easy strategy. But then some let emotions get in the way of an otherwise easy and relatively profitable investment style. We stick with it well enough when the price keeps going up. But when a deep correction happens we freeze or pull out. Effectively trying to time the market by re-investing at the bottom. Except of course, no one really knows for sure where the bottom is.
Another example is compound interest. Anyone who’s ever had credit card debt knows just how powerful it really is (unfortunately they were on the wrong side of it). And yet, it’s usually a (consciously) forgotten investment vehicle, because it usually takes the form of time deposits and never beats inflation. In it’s place, we chase equity funds or forex.
We tend to forget that investing in a sure thing (capital is insured, returns are guaranteed) isn’t such a bad idea. And theoretically, it could beat inflation.
It’s good to remember that monetary policy (which affects interest rates) is based partially on the inflation rate, which is computed after the fact. BSP isn’t going to lower interest rates until they see inflation is in control.
(Granted that only works in the specific scenario of an economy changing from a high to benign inflation rate.)
So time deposit rates will start going down when inflation has proven to
be on the down trend as well. Sure, it will end up below the inflation rate, but if you were optimizing your time deposit investment, there’s actually a small window (or large, depending on the term you got) where you might actually have beaten the inflation rate with a risk-free time deposit.
And when investing directly in stocks, we show our propensity to act rather than wait it out even though the result could be practically the same.
Take the Buy-and-hold strategy. Do your research, buy the company’s stock, and let it appreciate. Simple (relatively, at least), but then we try to time our entries and fixate on the trends and news cycles. But in relatively fast 10 years or so, how much of those will actually matter? Look up any blue chip’s price ten years ago – and the next two or four months after it – and compare it to today’s price. How much is that difference really? I’m wiling to bet it’s not worth losing sleep over.
Don’t get me wrong, due diligence and vigilance are important. But we shouldn’t confuse action with improvement.
If you liked this article, please subscribe to my feed, like me on Facebook, circle me on Google+, or follow me Twitter @thePFApprentice. It’s free, you won’t miss new articles, and you’ll also get my free ebook: the Super Savings Guide.
photo credit: Giorgio Montersino via photopin cc