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What is a Passive Investment? - Definition & Strategies

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Read this lesson to learn how passive investing can sometimes lead to better returns, if you use the right strategies. Learn how to move your money around for the best results.

Definition

When it comes to investing your money, there are two types of investment. There is active investing where you use various investing strategies that encourage buying low and selling high to maximize your return. There is also passive investment, the topic of this lesson, where you aim to maximize your return over the long term while minimizing your buying and selling activities.

There is a myth out there that passive investing yields lower returns than active investing. But with the right strategies, this does not have to be the case. With the right strategies, a passive investment can sometimes out-perform an active investment.

In this lesson, we'll take a look at a few strategies that work for passive investing.

Widen Out

One strategy you can use is that of widening out. With this strategy, you aim to spread out your investing so you aren't simply investing in just a few companies that may be performing well currently. Instead, you invest in all the well-capitalized companies in a particular market.

For example, say you are investing in the pet supplies market, instead of investing in just one company, you invest in all the pet supplies companies that are well supported financially. This way, you are able to capture the overall growth in a market even if one of the companies you've invested in does not do well.

Also, instead of just investing in the stock market, you can also invest in other areas as well, such as real estate, government bonds, and foreign equities and debt. This way, your possible return isn't limited by the growth of the stock market. You'll have even more sources of growth and returns.

Move Your Money Around

Another strategy you can use is that of moving your money around. With this strategy, you take your earnings from selling the stock that has grown and re-invest that money in stocks that are currently not performing well. Even though this strategy may seem counterproductive, the end result can sometimes yield you a higher return than the overall performance of the stock market itself.

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