By that convention, such an investment could be seen as rather tepid since the strategy is to buy and hold for a long time and let it grow. After all, I have heard the phrase, "Time is your best friend", many times. What I learnt recently altered my thinking of passive investing.
The various investment markets eg stock, bond, forex etc are highly liquid and inter-dependent for activities. The transactions are mostly made by active traders in both retail and institutional. However, given the high volatility in prices and seeming distorted valuations, why would a sane trader want to chase prices higher given that Covid is so persistent and damaging to global economy?
The answer could lie in the passive investor. By staying invested for the long term and possibly adopting a dollar cost averaging strategy, the funds representing the passive investor has to trade given their mandate. To them, current prices does not really matter since the idea is to apportion some funds monthly and keep investing. Hence, while general economy may be faltering and outlook is dim, investment prices are artificially kept high due to such passive fund inflows. The cycle replicates into various investible products since yields are low and after all, people may feel unaware of where to park their funds after rounds of quantitative stimulus. It seems the more governments splash the cash, the more these get channeled into the market froth through the regular workers and unsavvy person.
Of course there are other contributing factors in the investment markets but the passive investment community is actually a formidable group and it gets me thinking, this term is quite a misnomer and should not be misconstrued as such.
Tip: Sugarcane juice
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