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What Is Passive Investing and How Does It Work?
By Hiren Amin, Read bio | Updated on July 31, 2026
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Summary
Passive investing is a long-term, buy-and-hold investing strategy focused on buying and holding investments over time rather than trying to outperform the market through frequent trading. Many passive investors use investments like index funds and ETFs designed to track the performance of a market benchmark. Compared to active investing, passive investing is typically lower cost, requires less day-to-day management, and is often used by investors focused on long-term growth.
Table of Contents
What is Passive Investing?
Passive investing is a long-term investment strategy that focuses on buying and holding investments for the long term. Its goal is to build wealth gradually over time by buying and holding a diverse portfolio of investments focused on portfolio diversification and long-term growth. Instead of frequently buying and selling investments to try and beat the market, a passive investor seeks to buy and hold a portfolio of investments that may steadily increase in value over time, based on historical market returns.
The most common type of passive investing is index investing, often through index funds and ETFs, where investors seek to invest in a portfolio of stocks, bonds or other assets that mimic the composition of a particular market index.
Passive investing has become an increasingly popular investment strategy and may help investors build wealth and achieve their long-term financial goals.
Passive Investing in Human Terms
Passive investing is a bit like setting your phone’s GPS before a long road trip. Instead of constantly changing direction based on traffic or trying to find shortcuts, you choose a route designed to get you to your destination over time.
Rather than trying to predict which stocks will rise or fall next week, passive investors typically build diversified portfolios designed to grow gradually alongside the broader market.
Active vs Passive Investing
Active and passive investing are two common investment strategies, but they take different approaches to building wealth.
Passive investors generally aim to match the performance of a market index over time by buying and holding investments long term. Active investors, on the other hand, aim to outperform the market by actively researching, selecting, and managing investments.
Passive Investing | Active Investing |
Seeks to track market performance | Seeks to outperform the market |
Typically follows a long-term buy and hold approach | Often involves more frequent trading |
Commonly uses index funds or ETFs | Commonly uses actively managed funds |
Generally lower fees and trading costs | Typically higher fees and management costs |
Requires less ongoing research and monitoring | Requires more active portfolio management |
Performance generally tracks the market/benchmark subject to fees and tracking differences | Returns depend on investment decisions |
Both strategies are widely used by investors and may offer different advantages depending on an investor’s goals, time horizon, risk tolerance, and level of involvement. Some investors may also choose to combine active and passive investments within the same portfolio.
Active Funds vs Passive Funds
Active funds are managed by investment professionals who select investments based on a specific investment objective, such as outperforming a benchmark or managing risk in a particular way.
Passive funds, on the other hand, aim to replicate the performance of a market index or benchmark before fees and expenses. These funds typically follow a simpler investment strategy designed to mirror the composition of a specific market or market segment.
Passive Funds | Active Funds |
Aim to track a market index or benchmark | Aim to outperform a benchmark or meet a specific investment objective |
Commonly use index-based strategies | Managed through active investment selection |
Typically lower fees and trading costs | Typically higher management fees and trading costs |
Usually involve less portfolio turnover | Often involve more frequent buying and selling |
Performance generally follows the market | Performance depends on investment decisions |
Passive funds are often considered a lower-cost, long-term investing option, while active funds may appeal to investors seeking a more hands-on investment approach or specific portfolio objectives.
Take Note
Passive investing does not guarantee profits or protect against losses. Even diversified portfolios and index-based investments can decline during periods of market volatility.
Things to consider when choosing between active vs passive investing
The right investment strategy will depend on an investor’s financial goals, risk tolerance, time horizon, and personal preferences. Some factors to consider may include:
1. Risk appetite: Active investing generally requires higher engagement and risk tolerance as it depends on short-term moves and market can swing in any direction. Passive investing often uses diversified portfolios designed to reduce company-specific risk, although investors remain exposed to market risk and losses can occur, believing that market values will grow over time and provide reliable returns for investors.
2. Cost/ fees: Active investing typically costs more than passive investing. That’s because frequent trading and management in an individual portfolio will typically result in higher trading costs.
3. Time commitment: Active investing demands much more time commitment than passive investing, as it requires investors to stay informed about the market trends and actively manage or adjust their portfolio to meet desired short-term objectives. Passive Investing is generally sought by investors with less experience and/or those working towards a long-term goal.
Depending on their specific investment objectives, some investors may choose to invest in a combination of actively and passively managed funds.
How to Start Passive Investing
If you’re interested in passive investing, a common starting point is investing in mutual funds or ETFs designed to track a market index or benchmark. To get started, investors typically only need a brokerage account that allows them to buy and hold these types of investments.
If you don’t already have a brokerage account, you can open one with TD Direct Investing here.
FAQs
What is an example of a passive investment?
Investment funds that seek to track an index or other benchmark are typical examples of a passive investment. These can include mutual funds and exchange traded funds (ETFs). Passive investment funds typically have an investment objective that seeks to mimic market returns over the long term.
Who is considered a passive investor?
Anyone who follows a passive investment strategy can be considered a passive investor. Passive investors typically buy and hold investments for the long term instead of actively buying and selling investments based on short-term performance.
What is the most common passive investment style?
The most common style of passive investment is index investing. Index investing seeks to replicate the returns of a given market index by building a portfolio of investments that mimics the composition of specific markets or market segments.
What are passive investment funds?
Passive investment funds are typically investment funds with an investment objective that seeks to replicate the performance of a particular market index or other benchmark. Passive investment funds are usually cheaper to invest in than actively managed investment funds.
Is passive investing good for beginners?
Passive investing is often considered beginner-friendly because it typically involves a long-term approach and may require less ongoing research and trading than active investing.
Are ETFs considered passive investments?
Many ETFs are considered passive investments because they are designed to track the performance of a market index or benchmark. However, some ETFs are actively managed.
Can you lose money with passive investing?
Yes. Passive investing still involves market risk, and investment values can rise or fall over time depending on market conditions.
What is the difference between index investing and passive investing?
Index investing is one type of passive investing. It involves investing in funds designed to track the performance of a specific market index.
Is passive investing better than active investing?
Neither strategy is inherently better for every investor. The right approach depends on factors like investment goals, time horizon, costs, and risk tolerance.
Conclusion
Passive investing is a long-term investment strategy focused on building wealth gradually over time instead of trying to outperform the market through frequent trading.
For many investors, passive investing may offer a simpler, lower-cost approach to investing through products like index mutual funds and ETFs. Whether you’re new to investing or building a diversified long-term portfolio, understanding how passive investing works can help you decide whether it aligns with your financial goals, timeline, and comfort with risk.
And getting started may be simpler than you think. With a brokerage account through TD Direct Investing, investors can access a range of investment products, including ETFs and mutual funds designed to support long-term investing strategies.
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