Passive Investing
Categories: Index Funds
Passive investing is all about, um, “I give you money; you give me back more than this money some years from now.” Like...passive investing is that check written to a venture capital fund as a limited partner not at all involved in the daily oeprations of the fund. When you buy 100 shares of Pepsi, you’re passively investing in it.
Own a bunch of index funds that pay a dividend? Yeah, they're also passive income. And you’re a passive investor in them. And the funds themselves are generally passive as well. Yes, share counts are tweaked regularly, but in very small, relative amounts, so that they conform to whatever guides were promised to investors when they invested. And generally, index funds barely even vote on proxies or comment much (if at all) on management policy of the companies in which they invest.
Passive investing also lives inside of ETFs, or Exchange-Traded Funds, where initially a bundle of stocks is picked, and more or less nothing happens with them subsequently, other than that they move around a lot. Again, passive. Active investing is just the opposite. That is…the investor gets all up in management's face. They push for policy changes and board influence and other things notionally set to make the company worth more to its shareholder owners.
So that’s passive investing. But a passive investor is something a little bit different, in that you have invested money in securities, and hopefully, over time, make money from those investments...passively. That is, you didn’t directly work every day to haul bricks from one side of the construction yard to the other. You wrote a check for five grand, invested your money, and instead of you working for it...it worked for you.
Why does this matter? Taxes.
Generally speaking, passive investment gains are taxed at investment rates, i.e. if you held that investment for over a year, you're taxed at the usually much lower rate, or long-term gains rate. The brick hauling thing? Yeah, you get taxed at the very high, ordinary rates, because those are active...acts that you are performing in order to win your daily bread. Or donut, as it were. And the government feels that, when you’re working hard, you should be taxed at a higher rate.
Which really encourages people to, um, improve their Call of Duty skills.