Passive investing is a stable investment method chosen by many. Great investors like Warren Buffett and Benjamin Graham emphasize that following the market in the long run through passive investing is wise. In this article, we will explore the benefits of index funds, the difference from active funds, and why passive investing is important based on the advice of great investors.
What is passive investing?
Passive investing involves tracking specific market indices such as stocks or bonds. A representative example is an index fund that follows indices like the S&P 500. These funds are popular with many investors due to their low management fees and structure that allows them to track market returns over the long term. The core of passive investing is “following the market average.”
Advantages of Index Funds
The biggest advantage of index funds is their low management fees. This is the most significant difference compared to active funds.
- Lower fees allow for higher returns.
- Automatic portfolio diversification reduces risk.
- It’s stable as it follows the entire market rather than relying on the ability of a specific manager.
Views of Great Investors on Passive Investing
Warren Buffett is a strong advocate of passive investing. He has repeatedly mentioned that many fund managers fail to outperform the market. Buffett praised passive investing so much that he recommended investing in an S&P 500 index fund to manage his legacy.
Benjamin Graham’s Advice
Graham also emphasized the benefits of index funds. He pointed out that many fund managers fail to beat the market in the long run, and that index funds are a much better choice for regular investors. This is advice that still holds true today.
Why Passive Investing Is Better Than Active Investing?
Active investing is a strategy where fund managers analyze the market and select individual stocks to beat the market. However, most studies show that the majority of fund managers fail to outperform the market over the long term. For this reason, many experts emphasize that passive investing is a better option.
Career Risk and Herd Mentality
Many fund managers build portfolios similar to other funds to reduce career risk. This is a defensive choice to avoid heavy criticism even if their performance is poor. But this may not be the best choice for investors.
How to Succeed in Passive Investing
To succeed in passive investing, there are a few fundamental principles to follow.
- Make a long-term investment plan.
- Choose index funds with low fees.
- Don’t be swayed by market fluctuations.
By following these principles, you can achieve stable returns in the long run.
Conclusion: Passive Investing is a Wise Choice
Passive investing is a way to earn long-term returns without the burden of trying to beat the market. Great investors like Warren Buffett and Benjamin Graham strongly recommend it. By choosing index funds, you can follow a stable and profitable path in investing.
Reference: Novel Investor, “Wise Words on Passive Investing”