Since the introduction of tracker funds in the mid 70's, passive investing has risen in popularity. Between 2010 and 2020 the market share of tracker fund investment has doubled, accounting for 20% of investments in Europe and over 40% in the US.
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Passive investing strategy
The most common talking point will be passive investing index funds - these are the favorite of many reputable investors such as Warren Buffet and Jack Bogle.
In fact Jack Bogle believed in index funds so much he started The Vanguard Group, which specialises in low cost index funds - the philosophy being
"Rather than trying to find the needle in the haystack, you can just buy the haystack"
Opportunities can be found outside of stocks and lie in places that might not seem obvious at first - passive investing in real estate for instance.
Although real estate has the reputation of being passive relative to other businesses, it still requires a lot of work.
Even if you use a property management firm to deal with maintenance and rent payments, it can be hard to find firms to handle all the locations and types of property you want to own. And that still doesn't include the time and contacts needed in scouting locations, bidding and negotiating leases.
This is were the Real Estate Investment Trust (REIT) comes in.
A REIT is managed by a group of professional investors who buy a collection of properties and handle all of the legal and practical responsibilities. There are REITs that are general and ones that focus on specific locations, sectors and sizes.
Passive investing the evidence
The views of Warren Buffet on investing have been stated repeatedly in many outlets - most people ought to buy and hold the S&P 500.
Buffett proved that this strategy worked by way of a $1 million wager with active fund manager that their hedge fund would be beaten by the humble S&P 500.
The bet took place between 2008 and 2016, and Warren Buffett wiped away the competition by using a strategy of doing nothing.
Warren averaged a cumulative return of 73.1% and the actively managed fund averaged 19%.
The average hedge fund at the time managed a cumulative return of 22% and there was not a hedge fund found that came close to the S&P 500.
This article is not advice and has not been prepared in accordance with legal requirements designed to promote the independence of investment research – no recommendations are given in the buying, selling or holding of any investments. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.