How to Invest Passively

Passive investments and active investments are two terms you are likely to come up against when informing yourself about investing. This moneyland.ch guide answers the most important questions about passive investing.

What is passive investing?

Passive investing means investing broadly in an entire market, as opposed to actively buying and selling individual assets. Passive investing generally ties in with using a buy-and-hold investment strategy, in which you keep your investments for long terms without making ongoing changes to your investment portfolio. The goal of passive investing is for your returns to match the performance of a market index. In most cases, passive investing is done using investment funds – primarily exchange-traded funds (ETFs). An ETF can replicate an entire index, such as the SMI, DAX, or Nasdaq 100 stock indexes.

The opposite of passive investing is active investing, in which investors try to beat the performance of the overall market by picking specific assets and choosing how big a share each asset should have in their portfolio. There are numerous actively managed mutual funds that follow that goal. If you only invest in a small selection of stocks, that also qualifies as an active investment strategy.

How can I invest passively?

You can invest passively by buying shares in an exchange-traded fund (ETF) or index fund that replicates a market index. The difference between an ETF and an index fund is that ETFs are traded on stock exchanges, just like the stocks of companies.

To invest in an ETF or index fund, you need to have a stock brokerage account. You can compare accounts using the trading comparison on moneyland.ch. Alternatively, you can also invest using a neobank like Neon or Yuh, but the selection of available ETFs is limited.

Many service providers also let you create a savings plan for investing in ETFs. With these plans, your money is automatically invested in one or more ETFs at regular intervals (monthly, for example). You can find more information in the guide to Swiss fund savings plans.

The moneyland.ch checklist for choosing an ETF tells you what you should consider when choosing a fund to invest with.

What are the advantages of passive investing?

Investing passively has a number of advantages:

• Low costs: The main advantage of passive investing is that the costs are usually much lower. Passively-managed funds like ETFs and index funds typically have much lower ongoing fees than actively-managed mutual funds. Fund fees are shown as the total expense ratio (TER). Example: The most affordable ETF that replicates the MSCI World global stock index has a TER equal to just 0.1 percent of the amount invested. Many actively-managed funds have TERs that are higher than one percent.
• Minimal effort: Compared to buying individual stocks, investing passively in just a few ETFs or index funds requires a lot less effort. You do not have to rebalance your portfolio yourself or spend time following trends or picking momentum stocks.
• Returns are often higher: There is no guarantee that actively-managed mutual funds will be able to outperform average market growth. On the contrary, various studies show that there are very few actively-managed funds that have performed better than the market as a whole, over the long term.

It is important to understand that investing in the stock market always brings a risk of losing money. That also applies to passive investing with ETFs or index funds. Profits are never guaranteed, and losses can never be ruled out.

What are the disadvantages of passive investing?

Investing passively also has some disadvantages to investing passively:

• Less control: The main disadvantage of passive investments is that you are largely bound to market indexes and their components. It is possible that one or more poorly-performing stocks in an index can have major repercussions on the performance of a whole index over longer terms. The only way to rid your portfolio of the toxic stocks is to sell your whole investment in the ETF or index fund. It is worth noting, though, that despite this seeming weakness, passively-managed funds usually outperform actively-managed funds over long terms.
• Not all asset classes are available: Passive ETFs and index funds can only be used to invest in assets whose price is tracked by a market index. That means certain asset classes (alternative assets like whisky, for example) are not accessible to passive investors.

Do I have to invest on my own?

Passive investing takes relatively little effort. If you do not feel confident enough to choose the right ETF and buying and selling ETF shares yourself, then you can also use a robo advisor or other affordable asset management service. Robo advisors often invest in passively-managed funds like ETFs and index funds. Compare to conventional asset managers, robo advisors have relatively low fees. You can find more information in the guide to Swiss robo advisors.

Note: This article is provided for educational purposes only and should not be considered investment advice. The publishers do not accept any liability in connection with this article.

More on this topic:
Compare Swiss stock brokers now
How to invest money in Switzerland
Checklist for choosing stock to invest in
Checklist for choosing an ETF to invest in