The Layman’s Guide to Passive Investing

Abstract

Passive investing is a long-term method of investing that utilizes the time value of money and compounding interest. Passive investing allows the investor to compete with professional investors without active trading. Once the index fund is activated, the investor can walk away without having to manage it on a day-to-day basis. The risk of an index fund is practically eliminated by spreading the investment across a basket of instruments that allows the investor to minimize diversifiable risk. According to Kathryn Vasel of CNN Money (Vasel, 2020: CNN.com), only 39% of Americans could raise $1000 in an emergency. Think about that! Only 4 in 10 working Americans could come up with $1000 in an emergency. Could you raise $1000 right now if you needed to? The secret to passive investing is “Little and often fills the purse!” Left to one’s own management, a savings account will soon go dry. The secret to building wealth over time requires innovative tactics such as removing the responsibility of managing your money and automating it for free. In 1981, Herbert Whitehouse introduced the concept of the 401k plan as a way to subsidize pension plans. He later lamented introducing such an investment because instead of subsidizing a pension plan it replaced it. Today, pension plans are being eliminated as businesses face global competition and are forced to cut costs. Another problem with 401k plans is that many workers fail to transfer them to their new employment. For example, in 2019, the U.S. saw the greatest jobs turnover rate ever according to CNBC (Hess, 2020). Sixty-three million Americans quit their jobs because they found better jobs. Unfortunately, the majority of them decided to cash in their 401k’s instead of rolling them over to their new job. If you are fortunate enough to have a pension plan and a 401k, you should consider augmenting your retirement cash flows by starting a passive fund that is free to manage. By the time you retire, you should have enough cash to sustain your present standard of living.