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What Is a Passive Investor?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 August 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
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Passive investors are individuals who choose to not take an active role in the management of their investments. Sometimes referred to as a buy-and-hold or a couch potato investor, the strategy involves securing an investment or set of investments and allow them to ride for an extended period of time. This approach is often employed by investors who prefer to focus on long-term investment opportunities that are likely to yield an equitable return over time.

While there are exceptions, the passive investor focuses on investment opportunities that do not carry a great deal of risk. As a result, the need to monitor the periodic increases and decreases in security prices is eliminated. The idea is that even if there is some amount of fluctuation with the investment, the combination of upward and downward movements will offset one another over time, and still allow the investor to yield a decent return at some point in the future.

A passive investor may secure many different types of investments as a means of growing a portfolio. As part of the foundation, he or she may choose to go with stock options that have a history of consistent performance in a variety of economic climates, and are less likely to experience any severe drops in price. Along with stocks, the investor using a passive investing approach may also go consider bond issues that are structured to provide returns over a longer period of time, such as ten to twenty years.

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A passive investor may also choose to become an angel investor to a new business that shows promise of performing well once it is fully established. In return for the investment, the investor may receive stock options once the business is profitable, or arrange for a series of payments over a number of years as a means of recouping the investment. This approach allows the investor to create a steady stream of income without the necessity of actively managing the asset.

Passive investing is very different from an active investing strategy, in which the investor monitors the movement of investments closely, and buys and sells based on that movement. Often, the passive investor is more concerned with creating financial security over the long term, while an active investor seeks a return in the short term as well as providing a basis for security over the long term. A passive investor may change his or her approach from passive to active at any time, making it possible to adjust to changing circumstances if the need arises.

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