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What Is Passive Investing? And Why You NEED To Be Doing It

Updated: Oct 28, 2021

"Investing is only for the rich."

"Investing is too risky."

"I don't have enough money to invest."

I could go on and on. These are just some of the false beliefs a lot of people have around investing. I used to think the same way.

But then I discovered passive investing.

And my mindset completely changed around the topic of investing.

Now, I want to change yours too!

Here's a simple, easy-to-digest introduction to passive investing, and why you NEED to be doing it!

The content in the following article is not investment advice, and is for educational purposes only. If you are unsure about whether passive investing is right for you, please speak to a financial advisor.

What Is Passive Investing?

Passive investing is one of the most low-risk forms of investing. It is a long term strategy that focuses on building wealth slowly and not earning lots of money quickly, with very little active trading on the stock market.

Passive investing is easy to understand, requires little capital to get started with and is much cheaper in the long run!

Passive investing generates returns from compound interest, which basically means earning interest on top of your interest every year, rather than a flat rate (known as simple interest).

Passive investors contribute to their investments every month for decades, relying on the premise that as time goes on, the stock markets growth evens out between the booms and the busts (which it has done historically, the average return is 8%). And the interest they earn builds up massively over time due to the compound effect, creating incredible returns.

Still not convinced? Well, let me tell you about a man called Warren Buffett...

How Warren Buffett Became One Of The Most Successful Investors In The World

Warren Buffett is the king of passive investing.

He bought his first stock in 1942, at the age of eleven. And to say he hasn't looked back since would be quite the understatement.

He has become one of the richest men in the world, with an estimated net worth of OVER 100 BILLION!

He did this by buying stocks of good companies and holding them for decades. He learnt all about the benefits of long term strategies in his formative years and often talks about the benefits of investing in index funds & ETF's which track the stock market.

He didn't sell when his stocks were doing well to take the profits, and he didn't panic when the inevitable stock market crashes happened either.

And now he has a wealth the vast majority of us could only dream of.

Now I'm not saying you're gonna be the next Warren Buffett, but the fact that this man has built his fortune by investing passively in high quality companies and funds shows you the awesome power of passive investing.

Why Passive Investing Is Suitable For You

Warren Buffett started investing with just a few hundred dollars. And he's turned it into billions.

So there really is no reason for you to think that you can't build wealth and achieve financial freedom, whatever your level of income or savings.

None whatsoever.

In fact, I will give you an example right now to prove that you can do it too.

Lets assume you have £100 that you wanted to start investing with. And that you could only contribute £20 a month to a Stocks & Shares ISA.

If you did this for 30 years, assuming an 8% annual return (the all-time average UK stock market return) then your investments would look like this...

Initial deposit: £100.00

Contributions: £7200.00 (£20.00 a month for 30 years)

Interest earned (8%): £23,600.76

Total investments: £30,900.76

So with just an initial £100 and contributing £20 a month, in 30 years time you would have nearly £31k!

It shows just how powerful compound interest is, even with tiny contributions like this, you can make a huge amount of money.

Now let's up the ante a little bit. Lets say you had the average amount of savings for an 18-24 year old, which is £2,451. And you then contributed £200 a month to your investments.

Do this for 30 years and your investments would look like this:

Initial deposit: £2,451

Contributions: £72,000 (£200 a month for 30 years)

Interest earned (8%): £233,873.73

Total investments: £308,324.73

Amazing! Contributing £200 a month to your Stocks & Shares ISA would put you well on your way to a third of a million. That would set you up for a pretty tidy retirement.

I'll give you just one more example, and this is my own personal calculation for my investments. Once again assuming 8% annual return.

Total investments I have today: £8,301.73

Monthly contributions: £380.00

So lets use my figures to work out how much I would have in 30 years...

Initial balance: £8,301.73

Contributions: £136,800.00 (£380.00 per month for 30 years)

Interest earned: £515,795.91

Total investments: £660,897.64

Over 600K! I can't help getting excited by that!

Just like the two hypothetical examples, I am not contributing a lot every month to achieve these sky-high levels of returns. If I doubled my contributions per month I'd well over £1,000,000 in 30 years!

If you're not convinced by now that you should start passive investing as soon as possible...

Then read this article again.

The calculator doesn't lie. Compound interest is king.

You may question the 8% assumption, which is fair enough. Historical results never guarantee future returns. But it's the best indicator we have available to us.

To use a casino term, you have the house edge!

Why You Need To Be Passive Investing

As you've seen from the calculations above, passive investing can help you build a huge amount of wealth with very little monthly contributions or effort.

With savings accounts having rock-bottom interest rates, your money no longer has any business sitting in them (other than for an emergency fund).

Passive investing will help put you on the path to financial freedom, enabling you to earn potentially massive returns which you can bear the fruits of later on in your life.

I hope you've enjoyed reading this article. If you did, please consider buying me a coffee on Ko-Fi, any contributions will go towards improving this website. Thank you!


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