Three ways of Passive Investing

A passive investor should never indulge in comparing one stock with others in terms of its price.

Oct 07, 2014 08:10 IST India Infoline News Service

A systematic approach to 'passive investing' could pay you handsomely over a period of time, if followed wisely. But, people misunderstood passive investing with investing into real estate, which is a definitely involve a more of direct work like rent collection and property maintenance and thus, could not be categorized as passive. On the other hand, your investments in the stock market and debt instruments are more passive where stocks and bonds that you invest in work to make money for you. So, here are the three powerful tools to make your passive investing more meaningful.
 
Well-Capitalized Stocks: A passive investor should never indulge in comparing one stock with others in terms of its price. Rather, if the basket of stocks are well-capitalized and are part of a broad index, then it should be almost naturally be included in the portfolio.
 
Diversification across asset classes: A passive investor should always have the best of every asset classes in his portfolio, which means that the investment is carefully divided into stocks, bonds, real estate, commodities and other instruments and is not just exclusively tied up in the equity markets. Such portfolio should be weighed against the respective benchmarks so as to measure performance.
 
Rebalancing and Compounding: Though the trading philosophy teaches of 'buy low and sell high' but passive philosophy professes that an investor should sell the gainers to book profits and utilize the same to buy decliners, which have greater probability to outperform market in the forthcoming cycles. Secondly, once you start approaching retirement age, its recommended to shift your portfolio towards more conservative instruments like debt and gilt funds. However, withdrawing the whole money into cash is strictly not the move of a passive investor. This will ensure that a passive investor reaches his goals timely and is rewarded aptly for his patience and strategy.

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