Let’s pretend that you have been given Php100,000 to invest in the stock market, how would you do it? Many would probably say: “Invest in a company (or companies) that you think will do best.” While that seems completely logical, investing is not quite simple (and also not as complicated) as you think. Sure, the stock market is confusing and scary at times. You might even think that investing in the stock market is a lot like gambling. But you can’t take advantage of rising markets with your money stashed away in your bank savings account earning 0%.
On this post, I will illustrate you one strategy that can help you “win” or grow money from your investments.
ACTIVE INVESTING vs PASSIVE INVESTING
There are two ways to invest your money in the stock market – actively or passively.
Active investing is a short-term strategy that involves timing the market. You buy when prices are low, and sell when prices are high every few days or sometimes within the day.
Passive investing is a long-term approach ranging from few to several years timeframe and simply put your money in the market regardless of its prices. You buy carefully chosen stocks on a regular basis and seldom sell, allowing more time for the investment to grow. This type of investing is best associated with cost averaging strategy.
WHICH INVESTMENT STRATEGY IS BETTER?
In 2007, Warren Buffet posed a $1 Million bet. He challenged his high profile investing buddies that his single passive index fund would outperform any of their active hedge fund strategies. Buffet wanted to prove to them that “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”
With just a few months left, can you guess who’s winning?
As of March 2017, the five funds-of-funds (using the active investing strategy) gained 2.2 percent on a compounded annual basis in the nine years through 2016. That means $1 Million invested in those funds would have gained $220,000. Meanwhile, the index fund (that used the passive investing strategy) would meanwhile have gained $854,000.”
The point of this story is to illustrate that even the most famous investor believes and has proven that passive investing is the way to win the stock market.
WHAT INVESTMENT PRODUCTS CAN I START WITH?
If you don’t want the hassle of actively studying and picking out stocks, you can start investing with any pooled equity or growth funds like (1) Equity mutual funds (via investment/insurance companies), (2) Equity index mutual funds (via investment/insurance companies) and (3) Equity unit investment trust funds (via banks). These funds perform very well if you do cost averaging on them for many years.
Passive investing is not sexy (or exciting), but it works. For new investors, always go for passive investing because it’s easier and more convenient to do. Once you become more skilled and knowledgeable about your investments, you can take out a portion of your portfolio for active investing and continue with passive strategies (or you can just stick to passive investing).
Stay passive and stay unemotional. Invest on a regular basis. Have the discipline to stick to the strategy and patience to let your investments grow over time. Buy right and sit tight.