Learn The Basics

What all investors should know

The following page describes the bare necessities that we believe all investors should be aware of before they commit capital to the market. It is by no means an exhaustive training or course. However it'll give you a good understanding of the basics and how to get started with your investing. Investing involves risk including potential loss of principal. Consider your risks and objectives carefully before investing.

Passive Investing

Passive investing is a strategy that doesn't try to outperform or "time" the stock market with a constant stream of trades, as other strategies do.

Forget about stock tips or short term analyst recommendations to gain profits in the market. Instead, passive investing believes the secret to boosting returns is by doing as little buying and selling as possible.

Passive investing, is a thoughtful, time-honored philosophy which holds that, while the stock market does experience drops and bumps, it inevitably rises over the long hauls. So, rather than try to outsmart it, the best course is to mirror the market in your portfolio — usually with investments based on indexes of stocks — and then sit back and enjoy the ride. Simple to understand and easy to execute, passive investing has become the go-to approach for many investors.

You can invest passively with Pasiv (as the name suggests) and also earn passive income. In this course we'll talk about how to do both.

Review Your Finances

Knowing how much to invest requires you to take inventory of just how much money you can afford to invest. Before investing, it's important to get clear on your personal situation and life goals, including saving enough in cash for emergencies. When do you want to retire and how far away are you from that milestone? And what does your risk tolerance and budget look like? Understanding all of this will help you understand the role passive investing will play in your life and how to invest.

What is your current after-tax income — in other words, your take-home pay? What are your current expenses? How much debt do you have and what are your monthly payments? What is your net worth? (This is your assets minus liabilities.)

Answering these questions will give you a big picture view of your finances and give you insight into how much you can invest. Knowing your goals will help give your money a job and keep you motivated.

Risk is part of investing and can't be completely avoided. Take this risk tolerance quiz to see where you're at with risk.

Index Funds

Perhaps the most common passive investing approach is to buy an index fund tied to the market. These sorts of funds are often known as passively managed, or passive, funds. The underlying holdings in passive funds can be stocks, bonds, or other assets — whatever makes up the index being tracked.

The index fund constantly replaces the companies it holds to maintain it's indexing purpose (e.g. in case of the S&P500 - the largest companies in the world.) By investing in the index you're always invested in this listing.

Typically, index funds specialize in such areas as equities, fixed income, commodities, currencies, or real estate. Choosing different types of funds depends on the investor's desire for income or growth, risk tolerance, and needs to balance the portfolio. Fixed-income bond funds generally act as a counterbalance to growth stocks' volatility, for example, while foreign currency funds can help provide a hedge against the depreciation of the US dollar.

You can invest in an index fund in Pasiv by going to the "Market" screen, selecting "Funds" and choosing any issuer. Then select a fund that tracks the S&P500, Nasdaq, Russell 2000 or the Dow Jones - all four are considered the primary Indices in the USA.

Wealth Creation

The ultimate goal of passive investing is to build wealth gradually, as opposed to making a quick killing. Key characteristics of a passive strategy include:

Have An Optimistic Outlook: The core principle underlying passive investing strategies is that investors can count on the stock market going up over the long haul. By mirroring the market, a portfolio will appreciate along with it.

Keep Costs Low: Thanks to its slow and steady approach and lack of frequent trading, transaction costs (commissions, etc.) are low with a passive strategy. While management fees charged by funds are unavoidable, most ETFs — the passive investor's vehicle of choice — keep charges well below 1%.

Embrace the reality that you cannot build wealth overnight. It requires building a diversified portfolio, and investing into it on a regular basis knowing there will be periods it will fall in value, and over the longer run it will rise in value.

Diversified Holdings: Passive strategies also inherently provide investors with an efficient, inexpensive route to diversification. That's because index funds spread risk broadly by holding a wide array of securities from their target benchmarks.

Less Risk: By its very nature, diversification almost always brings with it less risk. Based on the funds they choose, Investors can also diversify their holdings further, within sectors and asset classes, with more targeted index funds.

Dollar Cost Averaging

Dollar-cost averaging is the strategy of spreading out your stock or fund purchases, buying at regular intervals and in roughly equal amounts. When done properly, it can have significant benefits for your portfolio.

Buying a security that fluctuates in price at different intervals and different prices “smooths” your purchase price over time and helps ensure that you’re not dumping all your money in at a high point for prices.

Dollar-cost averaging can be especially powerful in a bear market, allowing you to “buy the dips,” or purchase stock at low points when most investors are too afraid to buy. Committing to this strategy means that you will be investing when the market or a stock is down, and that’s when investors score the best deals.

A smart way to dollar cost average is to commit to buying into your portfolio everytime the overall index falls from its peak by a certain %.

Passive Income

Dividend investing is popular with many kinds of investors, but especially with older investors, many of whom are looking for a reliable stream of income to fund their golden years. The best dividend stocks can pay a meaty dividend and grow it over time, too. At any given time there are stocks paying 1% dividends, and 15%+ dividends.

Dividend investing is the cheapest most affordable way to generate passive income from the comfort of your home. All too often many people think of dividend investing as the province of stodgy investors, but dividend investing can be one of the most stable and lucrative forms of investing, especially when dividends are re-invested.

If you’re really looking to turn your portfolio into a dividend dynamo, then you’re going to need to invest for the long term. That means finding a solid dividend-payer and then sticking with it over time. That time element is absolutely crucial, but it’s easy to get tripped up when bad news hits.

Pasiv makes it easy for you to build an income portfolio by going to the portfolio lab and selecting Passive Income to find stocks & funds paying a yield.

Dividend Yield & Risk

Suppose you invest in a company that pays a 3% dividend per share. You own one share of the company, and shares are worth $100. In that case, you would receive $3 in dividends. US withholding tax is 30%, that means after tax you will receive 70% of $3. Buying stocks that pay dividends can reward you over time, as long as you make smart buying choices.

When investing, try to look for dividend safety. This means how likely it is that a company will keep paying dividends at the same rate or higher. You can check this by analysing the dividend payout ratio or the dividend growth over time.

Dividend safety is also determined by how risky or new an industry is. Even if a company has a low dividend payout ratio, your dividend payment will likely be less safe if the industry isn't stable. Look for companies that have histories of stable income and cash flow. The more stable the money coming in to cover the dividend, the higher the payout ratio can be.

You can choose a dividend yield in Pasiv and analyse the companies that come out of that filter to determine if they are risky or safe for your portfolio.

Choosing Your Funds

There are more than 2,500 funds for you to choose from. Some funds focus on a particular strategy, some funds are focussed on dividends, some funds are focussed on emerging markets, particular sectors, volatility based, sustainability based and some funds are actively managed and others purely just track the index.

When choosing your funds (a) check the assets under management or NAV (net asset value) - this tells you how large the fund is and how mainstream it has become. (b) check the expense ratio of the fund - this tells you all fees related to managing the fund. These costs and related fees can take a chunk of your wealth without you realizing it. You want to look for low expense ratios, typically below 1% as a benchmark. (c) check the fund holdings - what are the largest investments the fund makes and holds in its portfolio?, (d) who are the fund managers and do they have a track record of performing well?

Finally you want to get a sense of how the fund performs relative to the benchmark S&P500. Does the fund outperform the market? Does the fund underperform the market? How did the fund do during the most recent crisis? These answers will give you clues as to what else to include in your portfolio to balance out the risks posed by the fund.

Making Your First Investment

One way to make your first investment is to buy 1 share of a company's stock whose products you consider essential to your everyday personal life, and whose brand and reputation you hold above all others. Don't feel shy when it comes to investing in company's you believe in. Investing is about voicing where you feel capital should be allocated, by committing to a particular set of stocks (company shares) with your money & supporting these companies as a shareholder seeking to be part of their profit engine.

If you're not sure what to select as your first investment, try investing a tiny amount in the S&P500 index - considered the benchmark, and watch it for a few months to understand how your money changes in value.

*The cheapest fund that exists to expose yourself to the index you can check out by typing 'Price of VOO' in the chat in Pasiv and you'll be presented with one of the largest & lowest cost funds in the world tracking the S&P500, issued by Vanguard; the issuer many consider to be the home of passive investing.

* Not intended as investment advice. VOO is the cheapest & lowest cost index fund in the world.

Monitoring Your Money

Once you've started investing passively you want to do two things:

1. Continue to invest regularly. This may mean setting up automatic monthly contributions or setting a schedule when you add more money to your portfolio.

2. Check in regularly with your investments. Consider checking in on your investments at least once a year. You can also consider checking in quarterly. Many index funds rebalance on their own, but it's a good idea to check that your funds are still in alignment with your portfolio's goals.

Your assistant in Pasiv will alert you to how your portfolio performs over time and peform many checks in the background. Backtest your portfolio in Pasiv using the portfolio lab feature and check that the allocations make sense for your risk profile from time to time.