- What is passive investing?
- The effects of passive investing in shares
- Is diamond a good investment then?
Many people dream of earning money in a passive way. Who doesn´t want to make money from their couch? Fewer and fewer investors are really concerned when it comes to the value of assets. According to the head of the global investment company Fidelity everyone follows the common denominator. This way the risk is great that on any given day everyone will bet on the wrong horse. This trend is known as passive investing. There are several strategies that can be applied: from reasonable to completely passive.
Passive investing and passive income
For reasonable passive investing it is necessary to look at investments every day. You choose a number of elements to keep in mind, you only focus on these and send your portfolio based on these elements. For completely passive investing, you once make a number of investments in order to not make any changes afterwards. This obviously will have an impact on the return.
The financial markets and how the value of assets is determined, can be compared to a group of people who for example have to guess how many cookies there are in one box. Research shows that according to what we call “the wisdom of the mass”, the average number of cookies that the audience guesses, is consistently closer to the correct number, then a guess of an individual.
Of course the group must be large enough, but applied to the financial markets, this means that the price of a share (= the number of cookies in the box) is always an average of the value attributed by all the different investors, both the pessimists as the optimists, the proponents and opponents, the short-term and long-term investors and specialists with extensive analyzes.
A real risk
According to estimations, nearly a third of the global equity capitalization is managed in this passive way, or 20.000 billion dollar. Many investors are satisfied with the market average.
The effectiveness of the mass however is likely to disappear, because the diversity among investors disappears. More and more people are satisfied with the average, so fewer and fewer people comfort themselves to better understand and analyze the financial markets. To translate this to our example, less people are going to figure out how many cookies are really in the box. Since passive investors are part of the overall group of investors and their share in the group rises, diversity of the group is at risk. The total group is therefore less attentive. Passive investing after all only works if a decisive majority of investors continues to inquire about the price and value of the assets.
Are diamonds a good investment?
You could call investing in diamonds a way of passive investing. The fundamental difference with equities is that the return on an investment diamond does not depend on how active or passive you follow your investment.
BAUNAT DIAMONDS guides potential investors with a good investment in diamonds as part of a diversified portfolio.