Passive Investing In Australia
Last Updated on 11 February 2024 by Ryan Oldnall
What Is Passive Investing?
Passive investing, also known as long-term investing, is a strategy where investors buy and hold stocks for an extended period. Investors will typically hold onto these shares for 5+ years, but often 10 years and beyond. Passive Investing Australia has become a popular strategy as it allows people to gradually build their wealth overtime.
The main concept behind passive investing is to focus on long-term gains and compound growth, rather than getting caught up in short-term fluctuations.
One of the advantages of passive investing is its ability to remove emotional biases from investment decisions. It is a committed strategy that encourages investors to stay in the market regardless of whether it’s going up or down. By staying the course, investors can minimize administrative and brokerage costs that arise from frequent buying and selling of stocks.
When investors engage in active trading, they not only incur brokerage fees but also capital gain taxes, which can quickly erode profits accumulated over time. Moreover, cashing out prematurely prevents investors from fully realizing the compounding effect of long-term investing.
Passive investing operates on a long-term horizon, aiming to maximize the compounding effect, which becomes most significant after many years. Additionally, regular contributions on top of the initial investment can accelerate passive investment returns.
By consistently investing, investors can practice dollar cost averaging, which spreads their investment exposure over a wider time frame.
What Are The Benefits Of Passive Investing
The benefits of passive investing extend beyond financial gains. Emotionally, it offers peace of mind as it requires minimal maintenance and oversight. By committing to a long-term strategy, investors can avoid reactive decision-making based on market fluctuations.
With passive investing, there’s no need to actively manage a portfolio or constantly search for stocks to buy and sell.
Best Way To Passively Invest
For individuals looking to engage in passive investing, the best approach is to invest in exchange-traded funds (ETFs). ETFs are investment vehicles that provide broad market exposure. They typically track popular indices like the S&P 500 or the ASX 200, ensuring similar gains and losses over time.
Investing in ETFs offers several advantages for everyday investors. They provide capital growth as the underlying shares and companies within the ETFs increase in value. Many ETFs also distribute dividends, adding to potential returns.
Australia offers a variety of popular ETFs that track both global and foreign indexes. Examples include the iShares S&P 500 ETF (IVV) which tracks the top 500 US stocks, and the Vanguard MSCI Index International Shares ETF (VGS) which invests in approximately 1500 global companies.
ETFs And Cheaper Fees
One notable advantage of ETFs, in addition to their index-level returns, is their affordability in terms of fees. Unlike actively managed funds that rely on a team of investment professionals striving to outperform the market, ETFs offer a cost-effective alternative.
Actively Managed Funds often engage in frequent buying and selling of securities in an attempt to beat the market index, which can result in capital gains for investors. Additionally, these funds typically charge higher management fees, ranging from 1% to 2%, with some even incorporating performance fees.
In contrast, ETFs come with significantly lower fees, typically ranging from 0.1% to 0.5%, depending on factors such as the fund, index, and overall composition. For example, the iShares S&P 500 ETF (IVV) is a well-performing ETF with remarkably low fees, charging just 0.04%.
To put this into perspective, let’s consider a $10,000 investment in IVV. With an expense ratio of 0.04%, you would only be charged $4 in management fees. Despite the minimal fees, IVV has demonstrated an average total return of 12.47% over a 15-year period.
By choosing low-cost ETFs like IVV, investors can minimize the impact of fees on their overall returns. This cost efficiency allows individuals to maximize their investment gains and potentially achieve higher long-term growth.
Investing in ETFs with affordable fees not only provides cost savings but also aligns with the passive investing strategy, emphasizing long-term gains and compound growth. By avoiding the higher expenses associated with actively managed funds, investors can enhance their financial outcomes and make the most of their investment capital.
Passive Investing For Beginners
Passive investing is particularly suitable for novice or inexperienced investors due to its hands-off nature and lack of stock picking requirements. Not everyone has the time, resources, or expertise to replicate the success of legendary investors like Warren Buffett or predict the next Amazon or Google.
By adopting a passive investing approach, individuals can participate in the market and potentially achieve long-term financial growth without the need for active management or stock selection.
