What is passive investing?

Passive investing means owning the whole market cheaply and holding for the long term, rather than trying to beat it. Here's how it works, why it's so popular, and where an active value approach fits alongside it.

The basic idea

Passive investing means buying a fund that simply tracks a market index — like the S&P 500 or FTSE 100 — and holding it. You're not trying to pick winners or time the market; you're accepting the market's return, minus very low fees. It's "buy the haystack instead of hunting for the needle."

Why it works so well

Two reasons. First, cost: index funds charge a fraction of what active funds do, and fees compound brutally over decades. Second, most active managers fail to beat the index over the long run, so simply matching it puts you ahead of the majority. Diversification across hundreds of companies also removes single-stock risk.

Passive vs active investing

Active investing tries to beat the market by selecting individual stocks — which is what value investing does, buying quality companies below their intrinsic value. Passive accepts the market return for minimal effort and cost. They're not enemies.

How the two fit together

A sensible approach for many investors is both: a passive index base for diversified, low-cost, hands-off growth, then a smaller active layer of carefully-valued individual stocks to try to do better. The passive part is your foundation; the active part is where research and a margin of safety earn their keep.

Common questions