Who at least once in his life did not dream of living on interest? Indeed, having a passive regular income is a dream of many, but often there is a lack of reliable information on how to actually get your money to work, and not yourself.
One of the most urgent needs of modern man in society is the preservation and augmentation of accumulated funds. This task becomes relevant for anyone who has managed to get out of the paradigm “from paycheck to paycheck” and has accumulated any noticeable savings. Considering that our "from paycheck to paycheck" for many has turned into "from credit to credit", then this problem is certainly number one.
Many of us have long figured out the intricacies of deposits, someone even tried on the title of "serial depositor", transferring money to several banks. A noticeable layer of the population was burned at the mutual funds, the “people's IPO”, and managed to lose money in various kinds of pyramids. In this regard, enough experience. But he is more negative.
Interestingly, distrust of the word “investment” often develops as a result of the activity of brokers and other professional market participants.
As soon as a person wants to go beyond deposits, he ends up with a broker with his money. Those who are less fortunate fall into FOREX or give money to some dubious project with an advertising yield of 30-50% per annum. Needless to say, they lose money almost immediately. Since the marketing of brokerage companies is designed so that as many people as possible learn to do trading, the result of "investments" through a broker for many differs from FOREX and the pyramids not too much.
Therefore, the problem number two can be called a lack of understanding of how to manage their savings, when they finally appeared. In the world of personal finance, three important points can be distinguished.
This segment can be conditionally called "Financial literacy", as such interests as repaying bad loans, getting a surplus of the personal (family) budget, accumulating funds for an “airbag”, etc. fall here. Banking products and products of insurance companies work perfectly in this area (to protect against risks). The general and main goal of this segment can be formulated as to accumulate.
In recent years, the state has made significant efforts to develop financial literacy. Specialized sites appear, all-Russian events are held, financial consultants are trained.
The easiest way to name everything related to this sector is "investment for non-professionals." In Western terminology, the term "passive investment" has taken root.
The idea is very simple. A doctor or teacher, when he has some kind of accumulation, in most cases does not want and should not become a professional investor. He is simply not allowed to constantly look at market quotes, listen to analysts and watch channels like RBC. However, tasks such as protecting savings from inflation and increasing funds need to be addressed. Deposits are not suitable for this. What to do?
In English, you can find dozens of books and hundreds of articles about passive investments. The main promoter and "patriarch" of this approach can probably be called John Bogle – the creator of the investment company Vanguard, the author of the book Investors Against Speculators, Do Not Believe the Figures, The Passive Investor's Guide and others.
- low cost investments (commissions);
- the use of widely diversified index funds;
- long investment periods (from 5 years);
- moderate but constant income – without any attempt to get ahead of one or another stock index.
Index funds appeared in 1976 and since then have gained a fair share of the market due to their simplicity, transparency and low fees. Indeed, in order to buy securities in a proportion similar to the index, high qualification is not required.
A great addition to the main ideas of passive investing was the invention of another American – Harry Markowitz. The method, called asset allocation, allowed us to optimize the ratio of such funds in the investment portfolio. In 1990, Markowitz received the Nobel Prize in Economics, and his approach formed the basis of the Modern Portfolio Theory.
The best recognition of the asset allocation approach is the recommendation of the US regulator – the State Securities Commission (SEC – Security Exchange Commission). On the SEC website, it is recommended for non-professional investors to use the asset allocation method and explain its principles.
A big advantage is the uniformity of methods. In the world of passive investments, there is only one standard approach – asset allocation. Nothing else has been invented since the time of Markowitz and the creation of the first index fund. In this regard, an unprofessional investor is much better protected. He does not need, as a professional speculator, to study and compare dozens of methods and theories. Moreover, only the most basic information needs to be known about the asset allocation method itself. After all, a portfolio for an investor can be prepared by a financial consultant. In the future, the portfolio almost does not require attention, allowing you to engage in other activities, which is the main characteristic feature of passive investments. As a rule, a passive investor spends one or two days a year to maintain his portfolio, when it is necessary to bring all funds (assets) to the initially specified ratio. This process is called rebalancing.
The most common tasks for passive investments are to protect savings from risks and increase funds.
Special literature does not lag behind the pace of development of the industry. We have published and continue to publish a huge number of books, magazines, open sites, and paid and free courses on this topic. In fact, a whole "trading industry" has formed. Why is it profitable for professional participants? Everything is very simple – brokers are happy, as a typical speculator generates a huge number of transactions (purchase / sale), and the broker's business lives mainly on the commissions from these transactions. Brokers are helped by various kinds of "gurus" of trading, who earn pretty well on courses, because it’s easy to attract an unlucky client by drawing profitability with two zeros in the advertisement.
In professional investment, there is another important section. In the figure, it occupies half the space of the 3rd segment, but, unfortunately, its size is actually an order of magnitude smaller.
We are talking about business investment:
- Through exchange instruments – for simplicity, we call this approach “Value Investment”, although professionals have other popular strategies.
- Direct investment – the purchase of shares in companies not traded on the exchange