If you’re looking to grow your wealth without the constant stress of market fluctuations, passive investing could be the ideal strategy for you. But what exactly does passive investing entail, and how does it differ from more active strategies? In this guide, we’ll break down the basics of passive investing, explore various passive investment options, and look at how Mortgage Investment Corporations (MICs) can offer consistent, reliable returns.

Key Takeaways:

• Passive investing is about buying and holding investments for the long term, focusing on time in the market instead of trying to time the market.
• One popular form of passive investing is index investing, where you invest in a broad portfolio that mimics the performance of a specific market index.
• Mortgage Investment Corporations (MICs) offer an attractive form of passive investing, providing steady income from mortgages in Canadian real estate markets.

What is Passive Investing?

At its core, passive investing involves buying assets and holding them over time to benefit from gradual returns. The focus is on the long-term growth potential of your investments rather than trying to predict short-term market movements. By staying invested, you capitalize on compounding returns, which can lead to significant wealth accumulation over time.

One of the most common forms of passive investing is index investing. This strategy involves purchasing a portfolio of stocks, bonds, or other assets that follow or replicate the performance of a specific index, such as the TSX Composite Index or the S&P 500.

How Does Passive Investing Differ from Active Investing?

The main difference between passive and active investing lies in the investment approach.

• Active Investing: In active investing, the goal is to outperform the market by selecting individual stocks, bonds, or other securities through research, analysis, and strategic buying and selling. Active investors aim to beat market averages and generate higher returns by choosing assets they believe will perform well.
• Passive Investing: In contrast, passive investors take a hands-off approach. They invest in a broad range of assets that track a specific market index, with the aim of replicating the overall market’s performance rather than trying to outperform it. This strategy requires less management and fewer decisions about buying and selling individual assets.

Active Funds vs. Passive Funds

Active funds are managed by portfolio managers who select and trade investments based on market analysis and predictions. The goal is to achieve returns that outperform a specific benchmark, which could be an index or a set of criteria.

Passive funds, on the other hand, simply track the performance of a market index. These funds are typically rebalanced periodically to ensure they continue to mirror the index they follow. Because passive funds don’t require as much management, they generally have lower fees than actively managed funds.

Benefits of Passive Investing

• Simplicity: Passive investing is straightforward. By investing in an index fund, you can gain exposure to a wide range of assets without needing to constantly monitor the market or make individual investment decisions.
• Lower Fees: Passive funds generally have lower management fees because they don’t require active decision-making. Over time, this can result in significant cost savings.
• Transparency: With passive investing, it’s easy to see which assets you own, as these funds simply mirror the performance of a specific index. Investors can easily track their investment performance.
• Steady Returns: Passive investing tends to generate consistent long-term returns, especially when you invest over a longer horizon. The “buy and hold” strategy allows investors to benefit from the power of compounding.
• Lower Volatility: By investing in broad market indexes, passive funds offer diversification, which can help reduce volatility. Since these funds are less reliant on individual stocks or sectors, they tend to be less volatile than actively managed portfolios.

Drawbacks of Passive Investing

• Concentration Risk: Passive funds are tied to a specific index, which means they could be heavily concentrated in certain sectors or companies. For example, if an index fund tracks the S&P/TSX Composite Index, it will have significant exposure to the financial sector, which could impact performance if that sector underperforms.
• Less Flexibility: Passive investing doesn’t offer much room for adapting to market downturns. Investors are locked into the index’s performance, which can be challenging during periods of economic uncertainty.
• No Outperformance: While passive investing can generate stable returns, it doesn’t have the potential to outperform the market. Investors looking for higher returns may find this limitation frustrating.

Popular Passive Investment Options in Canada

Canada offers several passive investment options for those looking to grow their wealth with minimal effort:

• Index Funds: These funds track the performance of a specific market index, such as the S&P/TSX Composite Index. They are cost-effective, and their returns mirror those of the index they follow.
• Exchange-Traded Funds (ETFs): ETFs are similar to index funds but trade like stocks on the exchange. They allow investors to buy and sell shares throughout the day, offering greater flexibility than traditional index funds.
• Real Estate Investment Trusts (REITs): REITs allow investors to gain exposure to real estate without buying physical property. These funds invest in income-generating real estate, such as office buildings or apartments, and distribute rental income to shareholders as dividends. REITs can be an easy way to add real estate to your portfolio.
• Mortgage Investment Corporations (MICs): MICs pool investor funds to invest in a portfolio of mortgages. These funds generate income from interest payments on the mortgages, which is distributed to investors as dividends. Amur Capital’s MICs, for example, provide steady passive income from a diverse range of Canadian real estate markets. This can be an excellent option for those seeking reliable returns with relatively low risk.

Choosing Between Active and Passive Investing

The decision between active and passive investing comes down to your personal financial goals, risk tolerance, and investment horizon.

• Active Investing: If you’re seeking higher returns and are willing to take on more risk, active investing might be the right choice. This strategy requires a more hands-on approach and is suitable for investors who are comfortable with market research and making frequent investment decisions.
• Passive Investing: If you prefer a more straightforward, low-cost investment strategy with less frequent trading, passive investing could be a better fit. It’s ideal for long-term investors who want to reduce the complexity of managing their portfolio.

Conclusion

Passive investing offers a simple, effective strategy for growing your wealth over time with minimal effort. By investing in broad market indexes, index funds, ETFs, or MICs, you can gain exposure to a wide range of assets, benefit from steady returns, and minimize risk. While it may not offer the potential for market-beating returns, it is a reliable and efficient way to build wealth with less hands-on management.