Passive investing refers to an investment strategy where the investor does not seek to profit from short-term fluctuations in stock prices but rather looks to maximize returns by holding stocks over a longer term and by minimizing buying and selling activity. This strategy is informed by the fact that stock market overall moves in a positive direction over a longer period of time.
Index investing is one of the most common passive approaches to investment. This type of investing involves purchasing shares in representative benchmarks, such as the Standard and Poors 500 index, which represents a portfolio of stocks that reflect the overall performance of various types of financial markets. Called ‘index funds’ they typically charge lower fees for exit and entry than actively managed funds. Some of these index funds have expense ratios that are less than 0.5% of the amount invested.