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Finance: What are Passive Investing and Passive Investors? 2 Views

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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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00:00
finance a la shmoop what is passive investing and/or passive investors
00:08
all right well passive investing is all about I give you money you give me back [people exchanging money]
00:15
more than this money some years from now like passive investing is that cheque
00:20
written to a venture capital fund is a limited partner not at all involved in [hand writing check]
00:24
the daily operations of the fund when you buy a hundred shares of Pepsi you're

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]
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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
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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]
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