Passive Investing Strategies You Can Bank On

PUBLISHED Aug 11, 2022, 8:23:47 PM        SHARE

imgThe Purpose of Money Blog

Whether you recently began investing or you’ve been doing it for a while – do you know if you’re doing active or passive investing? For both novice and seasoned investors, there’s a lot to learn.

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Recent reports from Morningstar and S&P Global show that active investing – which is when you’re buying and selling stocks frequently – isn’t the best strategy during a volatile market like it has been recently. Using a passive investing approach, on the other hand – which entails employing a buy-and-hold strategy – has shown greater returns even when the market is seeing unexpected ups and downs.

Every investor wants to experience greater returns, right? So let’s explore more about this type of investing.

Why Passive Investing?

We’ve already answered that question – because passive investing has shown greater returns even in a volatile market. Yes, passive investing benefits the long-term strategist. Instead of trying to “beat the market,” like a day trader, a sound passive-investing strategy matches the market’s movements.

The gains earned with a long-term strategy aren’t quick and high like a buy and sell strategy. But, over the long haul, you’ll experience less market volatility and more certainty in returns. And that’s a better path to creating wealth.

There are a few different ways you can passively invest from Wall Street to real estate. Below is a primer on some tried and true passive investing strategies.

Passive Investing Strategies

Exchange-traded Funds

Exchange-traded funds (ETFs) are a group of securities traded on an exchange – the same way stocks are traded. Similar to mutual funds, ETFs track a specific index, commodity, sector, or asset. According to data from Morningstar, in September 2019, passive ETFs and mutual funds surpassed active funds in assets under management.

ETFs are, essentially, pooled investment securities that can be structured to track just about anything. You can invest in ETFs of:

  • International stocks and bonds
  • U.S.-only commodities
  • thousands of stocks across one, single industry
  • One specific commodity
  • A diverse mixture of investment types focused on one sector

Some popular ETFs are the SPDR S&P 500 (SPY) and the SPDR Dow Jones Industrial Average (DIA).

Exchange-traded funds are popular investment options for portfolio diversification, which is critical for any investor. They are cost-effective and more liquid compared to mutual funds. ETFs are considered “marketable securities.” They have a share price that lets them be easily bought and sold and they can be sold short.

Therefore, ETF share prices fluctuate as they’re bought and sold on the exchange throughout the day.

Note that an actively managed ETF means higher fees. This is why the passive route is the way to go if you want a more consistent return over the long term.

How To Start Investing in ETFs: Research is the first and most important step when deciding which ETF to put your 1) hard-earned dollars into. Check out apps like Robinhood or Stockpile to research a few ETFs. But be sure you consider the whole picture. Look into the entire industry or market the ETF resides in before investing. 2) Pick your investing channel or platform. Investopedia has a great resource for finding ETF brokers. But you can also use a Robo-advisor like Betterment, Wealthfront, or Vanguard to save on fees.

Passive Investing with Real Estate Syndication Companies

Investing in real estate isn’t traditionally passive investing. There are many things that need attention when rehabbing a commercial real estate property. And someone has to manage the ongoing maintenance of residential rentals. It might be you or a paid property manager.

With the high cost of entry into commercial and residential real estate investment and participation required, it might be unappealing. But passive investors can go a different route. A route that will reap consistent rewards if approached intelligently.

Here are some options to consider:

Real estate investment trusts (REITs) allow anyone to invest in income-producing real estate the same way they invest in stocks. REITs are specialized syndication companies not taxable at the entity level. REITs tax at the individual level at a lower rate as long as the company complies with IRA rules.

Two types of REITs exist:

  • Publicly-traded REITs can be bought and sold by any investor with a brokerage account. This form of REIT is favored for its steady returns, low minimums, and liquidity. Minimum investments begin at the cost of one share.

  • Privately-traded REITs offer the same tax benefits as publicly-traded REITs but can only be accessed by “accredited investors.” Accredited investors have to meet a minimum income and net worth requirement to purchase shares.

Want to dive deeper into investing in real estate without buying individual property? Take a look at this article.

More Ways to Passively Invest in Real Estate

Private equity firms are similar to REITs, pooling investor resources to purchase commercial properties, but they do not offer the same tax benefits. There are two kinds of private equity firms investors can get involved in:

  • Funds receive investor contributions, but individual investors have very little control over the use of their capital. The private equity firm controls the choice of property to invest in while investors sit back and let the firm do the heavy lifting.

  • Deals include investor input. Investors first decide on the property they want to pursue, then pool their funding sources together to purchase the property.

If you’re looking to maintain more control over your commercial real estate investment projects, private equity deals will provide that. If you’re interested in doing the required research upfront, but want a company to do the heavy lifting from then on out, try a private equity fund.

Decide which investing method fits your lifestyle and budget best before committing to either.

How To Start:

1.) Public records are as good a starting point as any. CoStar public records can help you find commercial real estate syndication companies that own properties you prefer. Find a few companies that align with your vision and values, then vet your list by researching their purchasing history.

2.) Facebook Groups and Meetup are good places to find real estate syndication companies. Use the search function in either platform to find companies, then scan through their top posts and recent meetups to understand if the group is a good fit. After you find a group you like, message the group’s leadership and ask how you can best get involved with upcoming deals.

Stocks, Bonds, and Mutual Funds

Finally, you can achieve passive investing simply by buying individual stocks, bonds, or mutual funds and keeping them. It’s important to do your research before choosing your investments. You don’t have to go it alone – the same Robo-advisor you can choose for ETFs will work for these types of investments, as well.

Check out these seven questions to ask yourself before investing in the stock market.

The bottom line is to start investing with a focus on passive investing so you can enjoy greater returns in the long run. That’s the sure path to creating wealth and the opposite of a get-rich-quick investment strategy.

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