passive investing is an investment strategy to maximize returns by minimizing buying and selling index investing is one common passive investing strategy whereby investors purchase a representative benchmark such as the s p 500 index and hold it over a long time passive investing can be contrasted with active investing 
understanding passive investingpassive investing methods seek to avoid the fees and limited performance that may occur with frequent trading the goal of passive investing is to build wealth gradually also known as a buy and hold strategy passive investing means purchasing a security to own it long term unlike active traders passive investors do not seek to profit from short term price fluctuations or market timing the market posts positive returns over time is the underlying assumption of passive investment strategy passive managers generally believe it is difficult to out think the market so they try to match market or sector performance passive investing attempts to replicate market performance by constructing well diversified portfolios of single stocks which if done individually would require extensive research the introduction of index funds in the 1970s1 made achieving returns in line with the market much easier in the 1990s 2 exchange traded funds or etfs that track major indices such as the spdr s p 500 etf spy simplified the process even further by allowing investors to trade index funds as though they were stocks passive investing benefits and drawbacksmaintaining a well diversified portfolio is important to successful investing and passive investing via indexing is enables investors to achieve diversification index funds spread risk broadly in holding a representative sample of the securities in their target benchmarks index funds track a target benchmark or index rather than seeking winners thus they avoid constantly buying and selling securities as a result they have lower fees and operating expenses than actively managed funds an index fund offers simplicity as an easy way to invest in a chosen market because it seeks to track an index there is no need to select and monitor individual managers or chose among investment themes however passive investing is subject to total market risk index funds track the entire market so when the overall stock market or bond prices fall so do index funds another risk is the lack of flexibility index fund managers usually are prohibited from using defensive measures such as reducing a position in shares even if the manager thinks share prices will decline passively managed index funds face performance constraints as they are designed to provide returns that closely track their benchmark index rather than seek outperformance they rarely beat the return on the index and usually return slightly less due to operating costs some of the key benefits of passive investing are proponents of active investing would say that passive strategies have these weaknesses fees for funds vary actively managed funds typically have higher operating costs than passively managed funds but it is always important to check fees before choosing an investment fund 3to contrast the pros and cons of passive investing active investing also have its benefits and limitations to consider but active strategies have these shortcomings 