Passive investing is the strategy of holding broadly diversified index funds rather than trying to pick winning stocks or time the market. It's not flashy, and it requires almost no action once set up. Yet decades of evidence show it outperforms the majority of active strategies after costs and taxes.
Active investing involves trying to outperform the market through research, analysis, and trading — picking stocks believed to be undervalued or selling those expected to decline. Passive investing holds the whole market through index funds, accepting market returns rather than trying to beat them.
A passive ETF like XEQT charges 0.20% MER. An actively managed mutual fund charges 2.0%+. This 1.8% annual cost gap must be overcome by the active manager just to break even. Year after year, this drag compounds against active managers.
In liquid public markets, prices reflect available information rapidly. Consistently finding mispriced securities is extremely difficult — and the professionals trying to do so are competing against each other with vast resources. Individual investors have no edge.
Index ETFs have low portfolio turnover — they rarely sell securities, so they generate fewer taxable distributions. Active funds that trade frequently generate ongoing capital gains even if you don't sell the fund.
A passive investor needs to make one or two decisions: which ETF, and how much to contribute monthly. No ongoing research, no earnings calls, no analyst reports. Time spent on investment decisions returns to zero.
Passive investors tend to make fewer decisions, which means fewer opportunities for behavioural errors — panic selling, chasing hot sectors, overtrading. The biggest threat to any investor's returns is their own behavior. Passive investing structurally minimizes decision-making and the damage it can cause.
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