When it comes to saving for retirement or if you’re aiming for financial freedom, investing is an essential step you can’t skip. However, as much as most Canadians understand the importance of investing, the thought of researching and buying a portfolio of stocks can be unsettling for new investors. That’s why passive investing continues to rise in popularity.
Passive investing is one of the smartest and simplest ways to build wealth over the long haul. Instead of trying to pick individual stocks, which can take a lot of time and effort, you own a broad basket of the market itself.
Therefore, you can simply buy a few ETFs that track an index like the TSX or S&P 500, and hold them forever, letting the market and natural long-term growth of the economy do the work.
That’s why it’s so popular. It allows Canadians to invest for the long haul, with consistent exposure to the overall growth of the economy and businesses. That’s crucial because not only does it save a ton of time and research, but it also gives you more confidence to stay invested through tougher economic times.
With individual stocks, investors have to be mindful not just of changing economic conditions, but of how the underlying businesses are performing and executing. When you invest passively, though, and gain exposure to the entire market, it’s far easier to commit to a buy-and-hold strategy.
That’s the beauty of passive investing, how reliable it is. Over the long term, the stock market has delivered average annual returns of around 7% to 10% after inflation. That includes crashes, recessions, bubbles, and everything in between.
When you invest passively, you capture that long-term upward trend without the stress of active management. Furthermore, fees on these index funds are often extremely low compared to active funds that charge 1% or 2% annually. Over time, those fee savings will also compound massively in your favour.
That’s why it’s called passive investing. You can buy these index ETFs in your portfolio, set it and then forget it. You can reinvest dividends automatically and let compounding do the heavy lifting over the years.
That’s why, not only is passive investing so popular, but starting to invest as early as possible is so important too. The longer your investing horizon, the more powerful compounding becomes.
A few thousand dollars invested young can grow into hundreds of thousands or more by retirement, all from boring, steady market returns.
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Why passive investing has exploded in popularity
One of the most significant reasons why passive investing is everywhere these days is that the evidence for its success is overwhelming. For years, studies have shown that most active managers underperform their benchmarks over time, especially after fees.
Furthermore, the rise in the popularity of ETFs changed everything. For example, you can buy the iShares S&P/TSX 60 Index ETF (TSX: XIU), which offers exposure to 60 of the largest stocks in Canada in a single investment.
Another solid option for Canadians, especially if you’re looking for exposure outside of Canada, is a fund like the iShares Core S&P 500 ETF (TSX: XSP).
What makes investing in these funds so simple and easy is that they trade like stocks but give you instant diversification. Furthermore, if you own these ETFs in a TFSA, all that growth over the years is tax-free, which supercharges the compounding.
And because investing doesn’t just require research upfront, but ongoing analysis to follow how your companies are performing, passive investing continues to rise in popularity because it fits how most people actually live.
Most Canadians don’t have the time, interest, or knowledge to follow earnings calls, read balance sheets, or monitor the news daily. That’s why it has become so popular in recent years for investors across the board, Canadians near retirement, young investors, and even a growing number of professionals.
