Passive investing allows investors to compound smaller amounts over time rather than investing large lump sums as soon as it is feasible, making it a generally low-cost strategy. Thanos Bismipigiannis, Head of Product at money management app Plum, has explained the ins and outs of passive investing and how Plum has managed to automate this strategy.
“Passive investing usually involves either leaving your money invested in selected funds for a few years, and/or contributing to the same fund regularly for a long time,” Mr Bismipiggiannis explained.
“If you look at the long-term growth of the markets over multiple years, despite short-term fluctuations, they have generally gone up.
“Passive investing maximises on this, accommodating any temporary peaks and troughs by taking a long-term view of eventual growth.”
The long-term aspect of this strategy also means that by placing a small amount today, and adding in whatever returns are made over time, may result in a compounded return at the end of the investment.
This is the key difference between active and passive investing, as active investing generally requires a singular lump sum to be invested with a singular amount being returned later.
Alongside this, active investing does have more flexibility as funds are not locked away but this flexibility is also why it requires active management.
Should the markets take a sudden downturn, this active management does offer an escape that passive investing can’t provide, but it comes at a price.
Active management is often more costly overall as one is no longer simply paying for the shares but also the people to manage it.
So, although passive investing is less flexible and has a long wait before getting any returns, it can be more fruitful in the long run than active investing.
However, Mr Bismipiggianis warned: “Bear in mind, however, that the total value of any capital you have invested is at risk, and so even previous returns are not protected from future losses.”
Another positive on passive investing is the passive management aspect, as Mr Bismipiggianis explained: “With passive investing, you also avoid having to time the market to ensure you buy low and sell high, which is very difficult even for professionals with much experience in the market.
“The aim instead is to invest with the same frequency in companies you believe will do well in the long-term, and not react to the market on a day-to-day basis.”
In this sense, passive investments do require a bit more research than that of active investments and investors should ideally be looking at how the company has done on average over the past 10 years.
Paying special attention to how affected a company was during large-scale events, such as the 2008 financial crash or the COVID-19 pandemic, could also provide a good indication of how your investment will fare during times of crisis.
Mr Bismipiggianis commented: “Any capital you invest is at risk from market fluctuations. Always do your research and consult a financial adviser if you want personalised advice on your investments.”
With a passive strategy, it’s also important to bear in mind that staying consistent will provide the best possible returns at the end of the investment period, according to Mr Bismipigiannis.
This is why automated passive investing has seen a large uptake recently, as apps and programs begin to utilise AI to make these already low-maintenance investments easily accesible to beginner investors.
“Apps like Plum allow you to automatically invest a percentage of the amount Plum saves for you into your funds of choice.
“By sticking to a regular percentage, you’ll be contributing to your future wealth consistently over time,” Mr Bismipiggianis explained.
Plum utilises Open Banking as well as AI to scan a customers’ preferences and budget in order to invest the right amount into passive mutual funds and investments can be as little as £1 per month.