Special Report

How to Gradually Build Wealth Using Passive Investing

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6. Exchange-traded funds

Exchange-traded funds track major indices, such as the S&P 500, MSCI Indexes, and the Dow Jones Industrial Average. Another difference between ETFs and other funds is that they can be traded like a stock.

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7. It’s about diversification

Instead of riding the hottest stock at any one time, a passive investment strategy rides out the market storms through diversification. Your investments are spread over a number of vehicles that are professionally managed with diversification in mind, so you are not locked into any one asset that may crash and leave you with considerably more loss than you wanted to risk.

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8. The pros of passive investing

Let’s face it: Trading stocks is hard work, and you could end up with significant losses if you pick the wrong ones. In passive management, a professional money manager is doing the work for you. Yet you always know what is in the fund. Another advantage is that your fees will be lower than if you tried to actively manage your portfolio. Also, by holding investments over the long term and with fewer trades, you are unlikely to have a massive capital gains tax at the end of the year.

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9. The cons of passive investing

With a passive investment strategy, you are invested in predetermined investment vehicles. While your rate of return may be slightly higher than the market with this hands-off approach, you probably will not get spectacular gains. Riskier investing strategies, including active management can have higher returns (but also far worse returns).

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10. Passive vs. active management

If you like to be more involved in managing your portfolio and pick individual holdings to aim for higher returns, a passive management strategy may not be the best option for you. Passive investment is for those who want to smooth out the market upheavals with diversification, reaping steady, but not outsized, gains.

Before embarking on either approach, ask yourself how much risk you are willing to take. If you don’t mind shouldering more risk, try your hand at active management. Risk-averse investors would be better served by passive management.

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