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Passive investing 101: What is it and how does it work?

Imagine growing your wealth without the stress of daily market fluctuations or the need for constant monitoring— that’s passive investing. But what is unique about this strategy, and how does it work?

In this guide, we’ll delve into the fundamentals of passive investing, explore different passive investments, and learn how Amur Capital offers a form of passive investing that is both consistent and reliable.

Amur Capital offers a simple way to grow your money and receive a stable and consistent return. Contact us now, and we’ll help you start in a few minutes.

Key Takeaways:

  1. Passive investing involves buying and holding investments that generate returns gradually over time, focusing on time in the market rather than timing the market.
  2. Passive investing often comes in the form of index investing, where investors invest in a portfolio of stocks, bonds, or other assets that replicate the performance of a specific index.
  3. With Mortgage Investment Corporations (MICs), you may benefit from a consistent passive income from actively managed funds comprising high-quality mortgages across vibrant real estate markets in Canada.

What is passive investing?

Simply put, passive investing is an investing strategy that involves buying and holding investments that generate returns gradually over time. Think time on the market rather than timing the market. This means that when it comes to passive investing, how long you stay invested to capitalize on compounding is more crucial than picking the perfect time to invest.

Passive investing often comes in the form of index investing, which is when investors invest in a portfolio of stocks, bonds, or other assets that follow or mimic the performance of a specific index, such as the TSX Composite Index and FTSE TMX Canada Universe Bond Index.

How does passive investing work vs active investing?

Investment style

A key distinction between passive and active investing lies in the investment style. With active investing, the goal is to outperform the market or get market-like returns. Active investors employ extensive research and analysis to pick and sell the appropriate stocks, bonds, or other securities.

On the other hand, passive investing takes a more hands-off approach. Instead of trying to beat the market, passive investors hold a diversified portfolio of assets that replicate the returns of an index.

Active funds vs. passive funds

Actively managed funds are derived from active investing, which means portfolio managers actively employ investment strategies to identify which assets can help achieve the fund’s objectives. The objectives can range from outperforming a particular benchmark to providing consistent returns over a specific time horizon.

On the other hand, passively managed funds replicate a market index’s rise and fall. This means passive funds need periodic rebalancing to stay consistent with the benchmark index. While active and passive strategies may require professional fund managers, the latter has a simpler strategy to implement and manage.

Benefits and drawbacks of passive investing

Pros of passive investing

One of the primary benefits of passive investing is its simplicity. Investors can achieve broad market exposure with a single investment, reducing the need for constant monitoring and trading. Other advantages include:

  • Lower fees: Since passive funds follow an index as their benchmark, there is little need for portfolio managers to constantly look for assets and strategies to boost the fund’s return. This could result in lower management fees.
  • Transparency: As a passive investor, there is no need to monitor the funds; you simply need to hold your investments as they follow a benchmark, and you’ll get constant update on their performance.
  • Steady returns: If you’re investing long-term, passive funds may provide better overall returns than active funds, according to investment research company Morningstar. In addition, passive investing’s “buy and hold” strategy can help generate higher returns in the long term thanks to compounding.
  • Lower volatility: Passive funds that track a broad market index tend to experience less volatility by diversifying across a large number of securities rather than focusing on individual stocks. Moreover, by simply holding the index, market timing (including its risks) is significantly reduced.

Cons of passive investing

Passive investing does have its drawbacks. These are:

  • Concentration: Passive strategies tend to focus on the broad market, which comprises sectors that significantly impact their performance. For example, a fund that closely mimics the S&P/TSX Index can be severely affected if the stocks of the financial companies, the largest sector on the index,
  • Less flexible: During periods of market downturns, passive investors, as well as portfolio managers, may have no flexibility to choose other assets that can offset the losses. Additionally, passive investing may not offer the potential for outperforming the market, which can concern some investors.

Passive investments in Canada

There are many passive income ideas in Canada, from high-interest savings accounts to creative digital products. If you’re looking for investment-based options, some of the best ones are:

Index fund

The performance of an index fund depends on the performance of the assets or companies within the index, which means they follow the assets’ rise and fall. This can mean two things: first, the returns will closely mirror the returns of the index it tracks but not outperform it, and second, the fees associated with index funds can be lower than those of actively managed funds because they require less oversight.

Exchange Traded Funds (ETFs)

ETFs are index funds that aim to mirror the performance of an existing stock market index. Unlike index funds, which you can only buy and sell at a set price after the market closes, ETFs operate like stocks, which means investors can buy and sell ETFs throughout the day.

Real Estate Investment Trust ETFs (REITs)

REITs are considered a passive way to invest in real estate because you get a portion of the rental income in the form of dividends payouts. The rental income comes from income-generating properties such as warehouses, apartment complexes, and hotels developed and managed by trust companies.

REIT ETFs hold several REITs in their basket, lessening exposure to a single property or geographic region. This diversification can help reduce the overall risk of the investment compared to holding individual REIT stocks.

Mortgage Investment Corporations (MICs)

Mortgage Investment Corporations (MICs) are specialized entities that pool investors’ funds to invest in a collection of mortgages. The managing entity earns income from mortgage payments, a portion of which is distributed to investors as dividends.

Amur Capital MICs offer investors the opportunity to receive steady and reliable returns from mortgages backed by Canadian real estate. Since dividends are distributed monthly, investors can utilize the earnings as a consistent source of passive income.

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How to choose between active vs. passive investing

The decision between active and passive investing depends on how your investment goals, risk tolerance, and time horizon affect your overall investment plan. Active investing may be suitable for those seeking higher returns and are willing to take on more risk. On the other hand, passive investing is ideal for investors looking for a more straightforward, lower-cost approach with less frequent trading.

Passive investing with Amur Capital’s MICs

Amur Capital offers a unique form of passive investing through Mortgage Investment Corporations (MICs). These investment vehicles expose investors to a diversified and high-quality portfolio of mortgages, offering stable and consistent returns over time. By investing in Amur Capital’s MICs, investors can benefit from passive income streams.

Connect with our investor relations team to get started today.

FAQs

A passive investment is an investment that generates returns gradually over time with no constant oversight or management by the investor.

Passive investing is generally considered a lower risk than active investing since it relies on staying invested for the long term and getting compounded returns, rather than actively picking the best assets in the market. However, all investments carry some level of risk, and it’s essential to consider your risk tolerance and investment goals.

Starting passive investing is straightforward. Passive investors can begin by researching and selecting low-cost index funds or ETFs that align with their investment objectives. Platforms like Amur Capital make it easy to get started with passive investing in MICs, providing a simple and efficient way to earn consistent returns over time.

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