Finance: What are Passive Investing and Passive Investors?

What are Passive Investing and Passive Investors? Passive investing and passive investors are ones who opt to ride the market out over the long term on a buy and hold strategy instead of trading in and out in accordance with the trend at the moment. Investors who have used this strategy have historically done well and in line with the most comparable index to their portfolio, albeit their exposure to market risk was absolute and rarely significantly better than the index.

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Transcript

00:29

passively investing in it index funds yep also passive here you're a passive [Pepsi stock transfer]

00:35

investor in them and the funds themselves are generally passive as well

00:39

yes share counts are tweaked regularly but in very small relative amounts so [share counter]

00:45

that they conform to whatever guidelines were promised to investors when they

00:48

invested and index funds generally barely even vote on proxies or comment

00:53

much if at all on management policy of the companies in which they invest so

00:57

they just kind of sit there as placeholders like a lot of congressmen [people sitting down in meeting]

01:00

passive investing also lives inside of ETFs or exchange-traded funds where

01:05

initially a bundle of stocks is picked and well more or less nothing happens [basket full of stocks]

01:09

with them subsequently other than that they move around a lot right they don't

01:13

tweak in the way they do index but all right again passive okay so then what's

01:17

active well active investing is just the opposite that is the investor gets all

01:21

up in management's face they push for policy changes and board influence and

01:26

other things notionally set to make the company worth more to its shareholders [money dropped onto table]

01:30

they actively research the company they actively check out the industry in the

01:36

margin structure and the revenue growth in the global 'no sand the policy [clip board check list]

01:40

changes legally in blah blah blah blah blah so that's passive and active

01:43

investing but there's also a notion of passive and active income and that

01:48

carries a very big difference meaning passive income is income you get from

01:53

investment gains like what we just described either index funds or actively

01:57

managed mutual and hedge funds all that kind of stuff make investment gains from

02:01

that since you're not doing it all day unless you're a professional money [men at computer]

02:04

manager and then that's different but if you're not doing it all day well then [woman fanning herself on porch]

02:07

it's passive income to you those dividends that get thrown off from all

02:11

those oil stocks yeah of income to you that bond interest

02:15

coming to you twice a year a thousand dollar bond and pay 6% you get 30 bucks

02:18

for yeah passive income okay got it well so then what's active income and why

02:23

does that even matter well it rhymes with sh max's yeah the tax treatment is

02:28

very different for passive income versus active income and generally speaking

02:33

passive investment gains are taxed at investment rates ie you held that

02:38

investment for over a year and if you did well then your tax it usually a much

02:42

lower rate or long-term gains rates like 20-ish percent maybe 25 30 if you're in

02:49

a blue states right they tack on the state taxes on top of it oh yeah and [map of USA]

02:52

then there's Obamacare as well alright but that's passive investment made from

02:55

long term gains realization like you buy stock at 20 you sell it at 30 you

02:59

realize 10 bucks a share in gains got it okay but then there's active income and

03:03

that comes from hauling bricks all day that brick hauling thing you get taxed [woman throwing bricks]

03:08

at very high ordinary income rates because hauling bricks well you ever

03:13

done it is an active act and it hurts your back well you're performing it in

03:17

order to win your daily bread or doughnut as it were and the government

03:21

feels that well when you're working hard you should be taxed at a higher rate

03:25

which really encourages people to you know improve their call of duty skills [man with gun]

03:30

well the key notion behind passive investing in passive investors

03:34

that'll work hard earn your money save your savings and then let your money

03:37

work for you so you can then be really passive [woman on porch drinking punch]