3 STEPS TO IMPLEMENT THE PASSIVE STRATEGY:

Step 1: Objectives, profile and portfolio

Define your investment goals (ex: 10% return per year) and build a portfolio with assets that have the capacity to achieve these goals but that also fits your profile as an investor (conservative, moderate, aggressive, etc.).

Step 2: Stay invested

Contribute periodically to your portfolio (and re-balance whenever needed), using the broker of your choice.

Step 3: Time and opportunities

Do not panic about crises or negative news: take advantage of opportunities and market conditions/cycles.
Let the time (ie. compound interest!) to act, protecting and monetizing your capital in the long run.

FEATURES OF A PASSIVE PORTFOLIO:

GOALS AND PROFILE.

A passive portfolio is based on investor´s goals and profile.

DIVERSIFIED.

A passive portfolio is well-diversified:

among different geographies.
among asset classes (preferably uncorrelated).
over time.

BUILT WITH ETFs.

A passive portfolio is built using ETFs. Advantages:

Greater simplicity.
Lower administration fees.
Less risk.
Returns in line with the market.
Low demand for portfolio monitoring (or portfolio rotation).

LONG TERM, BUT WITH OPPORTUNITIES.

A passive portfolio is for the long-term but also takes advantage of opportunities, such as anticipating market cycles.

CONTRIBUTIONS & REBALANCING.

A passive portfolio receives regular contributions in order to benefit from the market's rule #1: buy low (and sell high).

DATA AND ACADEMIC STUDIES.

A passive portfolio must be built using assets with the (statistical) capability to meet investor´s expectations and it explores the findings of studies from academia and from the investment industry.

EXAMPLE: A SIMPLE NZ-BASED PASSIVE PORTFOLIO, WITH ONLY 4 ETFs:

25% in New Zealand Equities

Invest in the local New Zealand listed companies.

Examples of possible ETFs:

Smart S&P/NZX 50 ETF (NZG) or
Smart NZ TOP 50 ETF (FNZ)

25% in Australian Equities

Invest in Australian listed companies.

Examples of possible ETFs:

Smart Australian Top 200 ETF (AUS) or Smart AUS TOP 20 ETF (OZY).

25% in Developed Markets Equities

Invest in listed companies from developed markets: US, Europe, Japan, etc

Examples of possible ETFs or index funds:

Vanguard International Shares Select Exclusions Index Fund,
Smart Global ESG ETF (ESG),
Smart US Equities ESG ETF (USA) or
Smart US 500 ETF (USF).

25% in Emerging Market Equities

Invest in listed companies from Emerging Markets: China, South Korea, Brazil, Mexico, etc

Examples of possible ETFs:

Smart Emerging Markets Equities ESG ETF (EMG) or
Smart Emerging Markets ETF (EMF).

FUTURE VALUE FORMULA: ESTIMATE THE RETURNS OF YOUR PASSIVE PORTFOLIO

Future value: estimated end balance Starting balance: the initial amount that you are investing (if any). Contribution: the monthly contribution to your investment portfolio Return rate: the average monthly return of your portfolio. Time: duration of your investment.
In the calculator below, we estimate in about 1 Million the end balance of a portfolio, starting from $1000, with monthly contributions of $1000, for 240 months (i.e 20 years) and returning 1% per month, on average.

Passive Investment Calculator

Passive Investor Calculator

(Enter the values below and discover an estimate of your final investment balance)

Start balance (in Dollars): Monthly contribution (in Dollars): Average return rate (% per month): Duration (in months):

Formula:

Note: Calculations are based on the future value formula with regular contributions:

FV = InitialValue*(1+rate)^time + ContributionValue*((1+rate)^time-1)/rate

HOW TO MAXIMIZE RESULTS (even with low initial investment)

Contributions:

Increase the amount of each contribution.
Increase the frequency of contributions.
Contribution to assets (or asset classes) that have a current distribution lower than the original distribution.

Time:

Invest for as long as possible.
Don't make unnecessary rebalancing (or portfolio rotation).

Return rate:

Aim to get the highest possible (and somehow stable) rate of return for the level of risk your portfolio is exposed to.
Minimize administration and brokerage fees.
Try to avoid unnecessary/upfront tax payments (on capital gains, for example).

PASSIVE INVESTOR'S GLOSSARY:

Investment portfolio

An investment portfolio (or portfolio) represents the set of investments made by a person (or institution).
It usually has more than one financial asset in more than one asset class.
It is described in terms of allocations (eg 25% in fixed income, 25% in real estate funds, 25% in shares, etc).
It presents a variable return over time, usually measured as a percentage per year (ex: average of 12.34% per year) or over a certain period (ex: 5.78% year-to-date)

Passive Investment

It is an investment strategy, generally focussed on the long term, where the aim is to obtain the same average return as the main stock market indexes, such as the S&P 500 or the NZX 50.
It is implemented via index funds (also called ETFs) that present greater diversification (and consequently less risk) than isolated assets such as a single company share.
This strategy requires less effort (and knowledge) to follow up, as it avoids unnecessary buys and sells and tends to present returns similar to active investment management in the long run, but with less risk and lower administration fees.

ETF (or index fund)

ETF (Exchange Traded Fund) is a financial asset traded on the stock exchange. It consists of several financial assets from the same assets class and seeks to replicate the performance of a given index, either fixed income or variable income.
ETFs are used on a large scale in the passive investment strategy because they are diversified and have lower management fees.
In New Zealand, ETFs are not capital gain taxed and some of them do not pay dividends since they are reinvested in their own units.
Examples of ETFs in NZX (New Zealand Exchange): Smartshares NZ Top 50 ETF (FNZ), Smartshares S&P/NZX ETF (NZG), Smartshares S&P/ASX 200 ETF (AUS), Smartshares US Equities ESG ETF (USA), etc.

Fixed Income

Fixed Income is a category of investments where it is known in advance what the final returns of the investment will be.
They are usually investments with fixed terms.
Examples of fixed income financial assets are term deposits and treasury bonds/bills.

Variable income

Variable Income is a category of investments where it is not known what the final return of the investment will be.
As the name implies, the prices of invested assets vary (significantly) over time, and may even show negative returns.
They are usually investments with no fixed term. Examples of variable income financial assets: shares, mutual funds, ETFs and Real Estate funds.

Deposits and Rebalancing

Contributions are investments (think of something like a deposit) made regularly in an investment portfolio. They aim to increase the volume of capital invested through new purchases. They are usually made from the savings made (or dividends received) by the investor in a given period, such as the difference between income and expenses.

Rebalancing is the activity of buying more assets that underperformed in the portfolio in order to go back to the desired allocation. It can be done through new investments or through the sale (full or partial) of assets that outperformed in the portfolio. Typically this re-balancing is periodic (eg. every January) or it is done when the portfolio deviates significantly from the desired allocation.

CONTACT:

TRENDSET Financial Education
www.trendsetconsulting.com/en
New Zealand
amvn@trendset.com.br twitter: @ArthurVallePhD

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