Why You Should Be Passive Investing: A Beginner-Friendly Guide
When it comes to making money, the word “passive” gets people’s attention. On the one hand, this sounds positive — I can make money doing nothing? On the other hand, it feels as if there must be some catch. But with passive investing, the word isn’t meant to be taken so literally.
Passive investing serves more as a comparison to its more well-known counterpart, active investing, which involves a more analytical and intentional strategy. It is for those of us who are low-risk, high-reward individuals who want to maximize our profits for the least amount of work.
We’re about to answer all of the questions zooming through your brain, like how passive investing works, how it differs from active investing and if it might be right for you.
What Is Passive Investing and How Does It Work?
It’s easy to think of investing as something that requires constant management. It sounds like it needs an endless monitoring of the markets and waking up with fear about how yesterday’s news affected today’s stocks.
But passive investing challenges that notion. Instead of investing with the idea of personally managing a variety of stocks and checking in on their continual progress, passive investing is intended for long-term results, owning a portfolio that in some way mirrors the market and that will grow with time.
Often, that looks like investing in index funds. For example, the S&P 500 Index, which performs according to the top 500 publicly traded companies in the United States.
Passive investing wasn’t always an obvious, or available, strategy. In his 2025 documentary “Tune Out the Noise,” filmmaker Errol Morris details the advent of index funds and, to some degree, passive investing through a group of researchers at the University of Chicago. Through data analysis and a long-term look at the market’s history, these academics determined that investors often could stand to gain just as much from a method that reflected the market’s long-term progress as from a more aggressive approach.
“Instead of pulling your hair out and watching financial news all day long, tune out the noise,” said David Booth, a founder of Dimensional Fund Advisors, in the film, as quoted in a Salon article. “Instead of outguessing the market, let me make all these thousands or millions of people who are investing work for me. I’m just going to sit back and let them duke it out.”
Benefits to Setting and Forgetting
One of the key benefits of passive investing is its lower ongoing costs. Passive investors usually don’t have to pay outside employees to manage or invest their funds and will pay fewer transaction costs as they will less frequently buy and sell stocks.
In the last 10 years, passive investing has become more common in equity markets in the United States, per data cited by the European Central Bank. In 2014, passive ownership represented roughly 7% of the market — now, it is about 20%.
Still, the risk of passive investing is that the very increase in investors utilizing the strategy could lower its overall benefits. J.P. Morgan Asset Management showed how, since 2008, the weight of the top 10 stocks in the S&P 500 has increased from roughly 20% to almost 40%. Despite that, the average annual return on the S&P was 14% for the last 10 years, proving that investors utilizing a passive strategy would have still had positive results.
Passive vs. Active Investing: What’s the Difference?
The difference between passive and active investing is represented even in their respective names. Booth says it well in the documentary, per Salon.
“The market is a big information processing machine. If you’re going to beat the market, you’ve got to be faster,” he said in the documentary. “Trying to outguess the market is more like gambling — it’s not investing.”
While active investors would likely take issue with that assessment, it is fair to say that an active strategy is more sensitive to the volatility of the market. That can work to or against investors’ advantage, depending on timing.
Active funds are generally “managed by professional investors who aim to beat the market,” notes Navy Federal Credit Union. “The managers use research and expertise to pick investments they believe will perform well.” This also requires ongoing support and, usually, ongoing payment.
Passive funds, instead, are much more intuitive and low-maintenance. They are more often intended for someone with a long-term presence in the market and require fewer fees but also fewer short-term gains.
Why Passive Investing Is Ideal for Most People
It’s safe to assume the vast majority of investors are not career financial analysts. They don’t have the time or perhaps the desire and analytical capabilities to constantly monitor the market.
But even those who have all three of those qualities may still choose a passive investing strategy.
“The big issue still applies,” said Christopher C. Geczy, academic director of University of Pennsylvania’s Wharton Wealth Management Initiative, in a Wharton executive education article. “That’s the issue of whether you believe in trying to beat the market or whether you believe in [minimizing] costs. Some of the most successful entrepreneurs I know think about costs.”
Aside from the most-cited positive, which are low fees compared to active investing, passive investments also have a few other advantages referenced by Geczy and other experts. These include transparency, as index funds make clear all of the stocks and bonds they contain, and tax ease, since a long-term investment strategy requires paying less — or no — capital gains tax.
Relatively current data also shows passive investing tends to perform at least marginally better than results from active mutual fund managers, per Wharton business economics professor Kent Smetters.
After taxes, managers of stock funds for large- and mid-sized companies had lower returns than index-style investors 97% of the time, according to Smetters’ research. The investment managers that did outperform the passive index had only a 20% chance of doing so again the following year.
Who Should Active Invest?
Where active investing could come into play is for those who want to focus on a specific segment of the market. Smetters uses emerging-market or small-company stocks as an example. In those instances, a fund manager who actively monitors a small segment of the puzzle could spot something that a passive strategy never would.
From a cost perspective, it’s also important to understand the long-term benefits. Barclays gives a data-backed example — investors generally pay annual fees of around 0.75% of the fund a year if they are actively-managed. Passive funds could cost as little as 0.1% or less a year. Over a 20-year period, that could save you almost 3,000 pounds, per their example of an initial £10,000 investment.
Whether passive investing is right for you ultimately comes down to your goals and your timeline. If you’re looking to get a strong return in a short period of time, an index fund is not the quickest way to that endpoint. But if you’re someone who wants a stable, long-term investment with almost guaranteed results and little management, both from a financial and time perspective, then passive investing is likely the best fit.
Still, there is one risk that we haven’t discussed. Over time, passive investing could become less of a sure thing. Goldman Sachs researchers recently noted that the S&P 500 will likely only have a compound rate return of 3% annually over the next 10 years.
And the European Central Bank has found that the very diversification that is a selling point of active investing, thought to make it more stable, could change as a wider swath of the market takes advantage of the strategy.
Passive Investing Apps That Do the Work for You
Made up your mind and ready to get started in your passive investing career? Here are apps that can practically manage the process for you.
1. Acorns
How it works: If investing feels like learning a foreign language, then you may want to use an app like Acorns, which aims to make saving and investing simple. Acorns’ strategy is to recommend what they call a “diversified, expert-built investment portfolio of exchange traded funds designed for long-term investing.” The app gives you access to a personal investing account, a retirement account, digital banking and even an investment account for kids. The idea is to let even small-time investors take advantage of the phenomenon that is compound interest.
How much it costs: But access doesn’t come free. Depending on your goals, you can subscribe to Acorns on three tier levels: bronze, at $3 a month, silver, at $6 a month and gold, at $12. At the lowest level, you’ll have access to an investment account with a selected portfolio and a retirement account. Higher tiers will get you a percentage match on your IRA account and the ability to customize your portfolio with individual stocks.
2. Stash
How it works: You can turn everyday spending into investments with Stash. The Stash Stock-Back® Card1 automatically rewards you with stock in the companies you shop with — like Netflix, Amazon, Costco and McDonald’s. And when you shop at local or privately owned businesses, you’ll earn stock in a default investment of your choice.
Stash also has features like Auto-Stash, where you can set aside as little as $1 per day to grow your investments automatically. Plus, Stash Learn gives you access to helpful tips on trending topics like AI-driven stocks and Swift Mania (yes, you can invest in that!).
How much it costs: Stash offers two pricing tiers, growth and Plus, at $3 and $9 a month, respectively. At the lowest tier, you’ll have access to beginner investing and personal finance advice, investing access and $1,000 life insurance. With a higher plan, you’ll be able to get your family involved, with advice on family finance, a portfolio for your kids and a $10,000 life insurance plan. Here’s the kicker: Right now, The Penny Hoarder users get $25 in cash when they make their first $5 investment. That’s easy money to jumpstart your portfolio. It only takes a few minutes to sign up, make your first $5 investment, and claim your $25 reward. Start building your future with Stash today.
Tips to Get Started With Passive Investing
At this point, you’re likely ready to start on your passive investing journey. Here are a few tips to get started.
Trust the timing
First, you’ll want to determine what investment period you’re looking at. Is this a retirement account and you plan to be out of the workforce in 30 years? Or are you hoping to buy a new home with these funds in 10 years? Knowing what your financial goals are will help you to make the best decision.
What’s the initial investment? And will you set up recurring investments?
You’ll want to ask yourself whether you already have some retirement funds or general savings you want to put aside in a lump sum or whether you plan to start with a small, recurring investment each month—or even each week. Will you put the lump sum aside and then leave it there? Or do you also want to continually add to the investment?
How will you invest your money?
Do you want to use an automated investing service like Acorns or Stash? Will you go for a more traditional group like Fidelity or Vanguard? There are plenty of ways to manage your money, and you’ll want to make the best choice for you based on the options available, the relevant fees and your long-term financial goals.
Don’t obsessively check your money
Because passive investing is meant for a long-term and not a short-term yield, it’s better not to obsessively check your funds, as doing so could lead to undue stress. The market has its inherently volatile days, and it is probable your funds will go up and down but ultimately balance out. For your own mental health, try to resist the urge to check, check and check. This may lead you to make some panic-driven decisions.
Passive Investing Is the Slow but Steady Way to Grow Wealth
In the end, passive investing may be the risk-averse investor’s best tool, but it’s also a data-backed one. Research has shown that passive investing can and often does outperform a more aggressive active investing strategy. What better time to get started than now?
Writer Elizabeth Djinis is a contributor to The Penny Hoarder, often writing about selling goods online through social platforms. Her work has appeared in Teen Vogue, Smithsonian Magazine and the Tampa Bay Times.
1Stash Banking services provided by Stride Bank, N.A., Member FDIC. The Stash Stock-Back® Debit Mastercard® is issued by Stride Bank pursuant to license from Mastercard International. Mastercard and the circles design are registered trademarks of Mastercard International Incorporated. Any earned stock rewards will be held in your Stash Invest account. Investment products and services provided by Stash Investments LLC and are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value. All rewards earned through use of the Stash Stock-Back® Debit Mastercard® will be fulfilled by Stash Investments LLC and are subject to Terms and Conditions. You will bear the standard fees and expenses reflected in the pricing of the investments that you earn, plus fees for various ancillary services charged by Stash. In order to earn stock in the program, the Stash Stock-Back® Debit Mastercard must be used to make a qualifying purchase. Stock rewards that are paid to participating customers via the Stash Stock Back program, are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value.
