I regularly find that many people (including many people with great experience in the market or in the financial industry) do not understand the meaning of the term “passive investment”.
Often this confusion arises from the confusion of the terms “passive investment” and “passive income”. The terms are similar, but their meaning is different.
And they should not be confused. Not all that brings passive income is passive investment.
The formal definitions of passive investments that search engines (or perhaps even some dictionaries) give out are often unfaithful.
“Passive investment is the provision of its capital to a third party or company (an asset management company, investment fund, or a personal manager). That is, this is a form of investment in which the investor only provides its capital in a passive role and manages they already have someone else "
Once again: the above is the wrong definition (albeit a popular one, unfortunately).
The essence of passive investments is NOT at all that you are not doing anything or wasting time on the process.
The essence of passive investments is that you consciously give up trying to get ahead of the market – both by choosing individual securities and by choosing the timing of operations. Moreover, in order for your investments to be passive, it is important that not only you personally, but also your capital, under whose management it should not abandon these attempts.
NOT a passive investment:
- Transfer of money in trust, if management is carried out according to active or speculative strategies
- Purchase of units of an actively managed fund, if management is carried out according to active or speculative strategies
- Using a trading robot or an algorithm that trades for you if management is carried out according to active or speculative strategies
- Investments in a hedge fund, if managed by active or speculative strategies
Personally, you can not do anything and lie on the couch, but in all of the above cases, this does not make your investments passive, as your capital continues to try to beat the market (with the wrong hands). And, therefore, in this case, your risks grow sharply to get profitability below the market, trading costs and management costs sharply increase, and, accordingly, your chances of getting at least an average market profitability sharply decrease.
Passive investments are when not only you do not make unnecessary movements in an attempt to get ahead of the market, but your capital does not make them, under whose management it is not.
Well, although this is not directly related to the above: passive portfolio investments have a number of important rules and restrictions on the assets used and the rules for dealing with them. Therefore, from slogans like “passive investments in Forex”, “passive investments in cryptocurrencies”, “passive investments in startups”, etc. do not have the right to be.