25 Jul Why Passive Investing Always Works
One of the most important questions the investor can ask is, “Am I an investor or a gambler?” By figuring out one’s approach to wealth building and saving, only then can we find the best long-term strategy for generating wealth.
For most, the better choice should be obvious: investing trumps gambling. That means we should take a long-term, passive approach rather than short-term, speculative approach.
In fact, day speculators rarely even make money… they’d be better off passively investing.
In the rest of this article, we’re going to review the definition of passive investing, look at why it works, and then apply it to gold and silver saving.
What is Passive Investing?
As the name implies, passive investing means patiently holding your asset without constantly selling it off and buying it back for “extra” profits.
In other words, a passive investor is someone who buys and holds for the long-term, without trying to buy and sell throughout the ups and downs. You have to be willing to endure fluctuations which would normally prompt investors to emotionally react.
For example, a passive investor might be someone who bought silver ten years ago and held on to it with a certain profit since then.
An active investor might have bought the same asset originally, but would have tried to “juice” the market for more returns by selling the asset and buying it back later. This is incredibly risky, because it means that one, by definition, must beat the market, plus make enough profit to pay for fees.
This is extremely difficult for active investors to actually pull off. Most don’t.
Alternatively, passive investors are able to look at the big picture. They are in it for the long haul and understand that day-to-day, month-to-month, and even year-to-year fluctuations don’t necessarily reflect the long-term profitability of an investment.
Instead, they rest easy in the knowledge that long-term appreciation will pay off for them in the future. When it comes to gold and silver, for example, we know what the long-term fundamentals look like. We see the global bubble. We see the problem with the US dollar.
We know the end game. Passively investing is a perfect match for gold and silver investing.
Why Active Trading Doesn’t Work
For most investors, active trading doesn’t work nearly as well as passive investing. When you account for the lost time and increased stress, it certainly doesn’t make sense. Here are a few basic reasons why this is the case:
Mathematically Impossible. It’s mathematically impossible for the average investor to be above average. This means that the average investor shouldn’t try to beat the market, by definition.
Speculators Have More Fees. The more you trade, the more opportunity for error there is, and the more you have to pay in trading fees. This is like paying extra in order to take on extra risk while ignoring the odds — it’s gambling, not investing.
The Market is Efficient. Beating the market doesn’t just mean you must be an above average individual investor. It also means that dollar-per-dollar, you must outperform the dollar-per-dollar returns of investment firms as well. That means choosing to essentially fight the odds out the gate. This is inherently speculative.
There are other reasons as well, but this should do for now. Active trading increases risk in such a way that it typically lowers long-term returns. Passive investing is superior.
Still, let’s look at more than just the fundamentals — let’s look at studies that have analyzed the consequences of passive over active investing
Study: Active Traders Lose Big
Studies can’t show us everything, but they can often point us in the right direction. While nothing can ever replace qualitatively analyzing the market and looking at the different possible strategies, studies can show us some of the quantitative truth that we can see so far.
And what is that truth? Active investors lose. They lose big.
In fact, active investors generally spend much more time than passive investors when it comes to their portfolios — and they make less money. It’s an embarrassing truth, but it’s still true.
In fact, a study by researchers at the University of California at Berkeley and other universities did a case study by looking at day-traders in Taiwan.
The study discovered that 8 out of 10 day traders lose money. This is one of the most comprehensive studies ever done on the topic, and the results are truly staggering.
A very small percentage of day traders make profits. In many cases, those profits are not large enough to cover transaction costs. Some, of course, make enough profits that they become famous and write books.
But, quite frankly, successful speculators are extremely rare. Since we’re investors and not speculators, this gives us even more of a reason to stick with passive, “boring”, simple investing.
But what about passive investing? How do passive investors fare? Quite well, actually.
Study: Passive Investors See Returns
There’s evidence that supports the idea that passive investing is a more practical and reliable approach. In “The Case for Passive Investing,” Aswath Damodaran presents the results of a carefully conducted study that highlights the merits of making investments and resisting the urge to constantly buy and sell.
According to the study, the average investor doesn’t beat the market. That’s largely because the average investor tries to micromanage his investments. Indeed, the more an investor trades, the less his profits tend to be.
This means that compared to active investing, passive investing provides more profits.
This isn’t just about stocks — this is how markets work, period. The average investor should try to ride markets over the long term, not “outsmart” them in the short-run. One strategy is investing and the other is speculating.
When actively trading, speculators are apt to sell when they shouldn’t and buy when they shouldn’t. Resisting the urge to buy and sell frequently, then, is a sound strategy. We can achieve this with passive investing and automating regular, monthly purchases.
Automation Lowers Risk and Stress
Human nature is difficult to overcome. Even those who are sold on the idea of passive investing develop itchy trigger fingers and often watch their carefully made plans fall apart.
The best way around this problem is automation. With automation, risk is reduced significantly. In turn, stress drops too. The rise of the Internet makes this goal far easier to achieve.
Automating your long-term investing should be done with SilverSaver®. We’ve built a system specifically designed for investors looking to use dollar-cost averaging and passive investing to build wealth over time.
Don’t lose money with strategies proven to fail. Build wealth steadily, securely, passively, and automatically.