Looking for your investments to match the market’s return? Opt for passive investing

Julie Brownlee, Fsp Invest, 13 Aug. 2014

Tags: passive investing, what is passive investing, active investing, etfs, investment strategy, market return,

Many investors look for ways to try to beat the market’s return. But this usually comes at a cost.

If you’re happy to match the return of the market, passive investing is for you.

So what is passive investing? And how can you do this in practice?

Let’s take a closer look…

What is passive investing?

Passive investing is the process of buying and holding a portfolio that reflects an entire stock (or bond) market.

The easiest way to do this is to invest in exchange traded funds (ETFs) that track an index. They mirror the performance of an underlying market, minus a small fee.

There are also some unit trusts that do this, but fees are generally higher than ETFs.

The idea behind passive investing is that you’re better off aiming for the market return as for every investor who beats the market, there will be one that doesn’t.

The market return is the average of all investors in the market, the team of experts at Money Week explains.

An active investment strategy may outperform the market, but at a high cost

Investors who opt for more expensive active investing do so at a cost. Their fund managers cost more in their bid to beat the market. The active strategy leads to more trading costs and high management fees.

If you add up all these fees, in many cases, active investors don’t get as good as a return as the market average. This is all down to the higher fees.

So whilst actively managed funds may claim to beat the market, the fees leave most investors worse off as a result.

By opting for passive investing, less of your money will go on costs. And this results in investors being better off as they consistently achieve the same return as the market.

So there you have it, why passive investing is for you if you want to match the market’s return.

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