What is Passive Investing? Explaining Recommended Methods, Pros, and Cons

Summary

“I want to start asset management, but I don’t have time for investing.”
“Is there a way to set it up once and have it run automatically?”

One option for people like that to consider is “passive investing.”

Passive investing is an investment style that aims to build assets while minimizing the effort of daily trading and management by utilizing mechanisms such as automatic savings settings and automated management.

However, “passive investing does not mean that assets will increase without doing anything.” The risks and the necessity of management differ depending on the investment method.

In this article, we will compare typical methods of passive investing and explain the pros, cons, and points to prevent failure.

What is passive investing?

Passive investing is an investment style where you continue to manage assets without frequent trading after setting up purchases or savings plans.

It is not a term that refers to a specific financial product or system, but includes various methods such as automatic savings purchases of investment trusts and automated management by robo-advisors.

For example, if you set up automatic savings for investment trusts, you can continue regular purchases without having to place orders yourself every month.

There are also ways to leave the management of asset allocation to investment services or investment trusts.

However, automating purchases is different from leaving the review of asset allocation to others.

The suitable method changes depending on which part of the effort you want to reduce.

Reference: Basics of Asset Formation | Financial Services Agency

Pros of passive investing

1. Reduce the effort of daily trading and management

The advantage of passive investing is that it reduces the time and effort spent on asset management.

If you use automatic savings, you do not need to place a purchase order every time. Also, by using investment trusts or management services that review asset allocation, you can delegate some of your investment decisions.

For people who are busy with work or housework and find it difficult to check the market frequently, it is one of the easier methods to continue.

2. There are also methods that can be started with a small amount

Some investment trusts can be purchased in small amounts depending on the distributor.

A key feature is that even if it is difficult to prepare a lump sum, you can start building assets with a monthly amount that fits your budget.

However, the minimum purchase amount varies depending on the product and the distributor.

3. Easy to engage in long-term asset building

By utilizing mechanisms such as automatic accumulation, you no longer need to judge the timing of your investments each time you purchase.

Additionally, by reinvesting the profits earned from management, you can expect a compounding effect where profits generate further profits.

However, long-term management does not guarantee profits. Depending on the investment target and market environment, losses may occur.

Main methods of hands-off investing

Hands-off investing includes methods to automate monthly purchases and methods to entrust asset allocation management to investment firms, etc.
Representative methods include automatic accumulation of investment trusts, robo-advisors, and investment trusts that manage asset allocation.
Let’s look at the mechanisms and features of each.

Automatic accumulation of investment trusts
Automatic accumulation of investment trusts is a method of regularly purchasing investment trusts by pre-setting the products to purchase, the amount, and the frequency.
Since there is no need to place an order every time, it is easy to continue investing.
Also, when purchasing a fixed amount regularly, the quantity purchased is smaller when prices are high and larger when prices are low.
However, accumulation investment does not guarantee profits, and there is a possibility of principal loss depending on the market environment.
Also, automatic accumulation is a mechanism to skip the purchase procedure, and it does not necessarily mean that the allocation of held assets is automatically reviewed.
Robo-advisors
Robo-advisors are services that support asset management proposals and management online.
They mainly consist of advisory types that propose asset allocation, etc., and discretionary investment types that perform buying and rebalancing on behalf of the investor.
With the discretionary investment type, you can entrust certain management tasks to the service provider based on the contracted investment policy.
On the other hand, the advisory type is a mechanism for receiving proposals regarding management, and the actual purchase and management decisions are basically made by the investor themselves.
Note that not all robo-advisors use AI. Also, management content and costs vary depending on the service.
The types of robo-advisors and their differences from investment trusts are also explained in detail in the following article.
What is a robo-advisor? Explaining the mechanism, types, and differences from AI-utilized investment trusts for beginners
Investment trusts that manage asset allocation
Some investment trusts diversify investments into multiple assets such as stocks and bonds, and manage asset allocation based on investment policies.
For example, balanced investment trusts allow you to invest in multiple assets with a single product, reducing the effort of combining individual products yourself.
However, management methods vary depending on the product.
Some products aim to maintain a predetermined asset allocation, while others change the allocation ratio according to the market environment, etc.
Therefore, when choosing an investment trust, it is important to check not only the investment target but also the policy under which asset allocation is managed.
Can NISA and iDeCo also be used for hands-off investing?
When considering hands-off investing, there are also ways to utilize systems such as NISA and iDeCo.
However, NISA and iDeCo are not products or services that automate management, but systems for engaging in asset building while receiving tax benefits.
Let’s understand the features of each.
NISA
NISA is a system where investment gains obtained from eligible financial products are tax-exempt.
NISA has a “Tsumitate Investment Quota” and a “Growth Investment Quota”.
In the Tsumitate Investment Quota, you can purchase up to 1.2 million yen per year of certain investment trusts suitable for long-term, cumulative, and diversified investment.
If you set up automatic accumulation for eligible investment trusts, you can engage in asset building utilizing the tax-exempt system while skipping monthly purchase procedures.
However, using NISA does not prevent price declines or principal loss of the investment target.
Reference:NISA Special Website | Financial Services Agency
iDeCo
iDeCo is a private pension system where you contribute premiums yourself and choose investment products to prepare for retirement funds.
In addition to the premiums being generally fully tax-deductible, there are tax benefits such as investment gains being tax-exempt.
Because you can use a mechanism to contribute premiums regularly, you can continue preparing for retirement funds in a planned manner.
On the other hand, you need to choose the investment products yourself, and it is also important to consider reviewing them according to the management situation.
Also, as a general rule, you cannot withdraw assets until age 60, so it is not suitable for funds you plan to use in the near future.
Reference:Overview of iDeCo | Ministry of Health, Labour and Welfare

Disadvantages and points of caution for hands-off investing

Possibility of principal loss

Hands-off investing is a method to reduce the effort of management, not a mechanism to prevent losses.

Since the prices of investment trusts, stocks, etc., fluctuate depending on the market environment, the asset value may fall below the purchase price.

Costs are incurred even with automatic management

Investment trusts incur costs such as trust fees, and robo-advisors may also incur service usage fees, etc.

Check the scope of management you can entrust and what costs are incurred for that.

Completely leaving it alone may cause you to miss changes in risk

Even if an investment method was suitable for you when you started, the appropriate investment amount and the magnitude of risk may change due to changes in asset price movements or living environments.

Therefore, even with hands-off investing, it is important to check your investment status periodically.

3 Points to Avoid Regrets with Hands-Off Investing

1. Do not invest funds necessary for daily living

Ensure you have enough funds set aside for living expenses to prepare for illness, unemployment, or sudden expenses.

If you invest money that you plan to use in the near future, you may be forced to sell at an unfavorable time if the market drops.

2. Distinguish between automating purchases and automating portfolio management

While automatic accumulation can reduce the hassle of purchasing, it does not necessarily mean that the allocation of your assets will be automatically reviewed.

On the other hand, there are products that leave the review of asset allocation to the investment company or service.

It is important to clarify whether you want to “automate purchases” or “also delegate asset allocation management.”

3. Periodically check your investment status

You do not need to check price movements every day, but it is important to periodically review whether there have been any changes to your investment goals or risk tolerance.

Also, if you hold multiple products, check to see if your investments are overly concentrated in a specific asset class.

How to start hands-off investing?

When starting hands-off investing, thinking in the following order will make it easier to choose the method that suits you.

STEP 1: Determine your investment goal and investment period

Clarify what you are investing for, such as retirement funds or future living expenses.

STEP 2: Compare investment methods

Consider whether you will use automatic accumulation or delegate asset allocation management, and compare products and services.

STEP 3: Open an account and choose products

Open an account with a financial institution that handles the products you have chosen. If you are using NISA, also check the eligible products and the investment quota you can use.

STEP 4: Set up purchases and automatic savings

Decide on a purchase amount within the scope of your surplus funds and set up automatic savings as needed.

STEP 5: Periodically check the investment status

Even after purchasing, check whether the asset allocation and investment policy still align with your goals.

What if you want to delegate the review of asset allocation as well? The option of AI-powered investment trusts

When considering hands-off investing, it is important not only to consider the effort of purchasing but also how to manage asset allocation after purchase.
For example, some investment trusts diversify investments across multiple assets while changing asset allocation according to market conditions.

One such example is the “ROBOPRO Fund” established and managed by SBI Okasan Asset Management.

The ROBOPRO Fund is an AI-powered investment trust and is different from discretionary investment robo-advisors.

The AI analyzes over 40 types of market data to predict the returns of each asset about one month in advance. Its feature is using those predictions to flexibly change the allocation ratio across multiple assets.

In principle, it performs regular rebalancing once a month, and may also perform ad-hoc rebalancing depending on market conditions.

Since investors do not need to decide individual asset allocations every month, it is one option to consider for those who want to leave asset allocation management to the investment mechanism.

However, AI predictions are not always accurate, and there is a possibility of principal loss. Also, there are costs such as trust fees for management.

When considering a purchase, be sure to check the investment policy, risks, and costs.

Frequently Asked Questions about Hands-Off Investing

Q. Can beginners start hands-off investing?

There are methods that are easy for people with little investment experience to consider using, such as automatic savings for investment trusts.

However, regardless of investment experience, it is important to understand the mechanism and risks of the product before choosing it.

Q. How much can I start hands-off investing with each month?

The minimum purchase amount varies depending on the product and the distributor. While there are investment trusts that can be purchased with small amounts, not all products can be purchased starting from the same amount.

Q. Won’t I lose money if I use hands-off investing?

There is a possibility that losses may occur.

Automatic accumulation and automatic management are mechanisms to reduce the effort of trading and administration, and they do not guarantee principal or profits.

Summary: Choose Hands-Off Investing Based on ‘What You Want to Delegate’

Hands-off investing is a method that aims to build assets while reducing the effort of daily trading and management by utilizing automatic accumulation and management services.

However, the scope of automation, risks, and costs vary depending on the investment method.

Do you want to reduce the effort of purchasing, or do you want to delegate even the management of asset allocation?

Understanding this difference is the key to choosing an investment method that suits you.

Investment trusts like the ROBOPRO fund, which uses AI to flexibly review asset allocation, are also an option.

Instead of thinking of ‘hands-off’ as complete neglect, let’s aim for sustainable asset formation by understanding the management mechanism and checking the situation periodically.

＜Please refer to the link below for investment risks, costs, etc.＞https://www.sbiokasan-am.co.jp/fund/553175/

＜Please refer to the link below for handling distributors＞https://www.sbiokasan-am.co.jp/fund/553175/sales#ancFund

The investment principal of investors is not guaranteed, and losses may be incurred due to a decline in the net asset value, which may fall below the investment principal. Investment trusts are different from deposits and savings. All profits and losses arising from the investment trust assets belong to the investors.

The fund invests in securities with price fluctuations such as domestic and foreign stocks, domestic and foreign bonds, domestic and foreign real estate investment trust securities, and commodities, so the net asset value may decline and losses may be incurred due to the influence of price declines of the incorporated securities, etc. In addition, since it invests in foreign currency-denominated assets, losses may be incurred due to fluctuations in exchange rates.

The investment performance posted in this document is based on the past and does not guarantee future investment results. Also, taxes, fees, etc. are not considered.
When applying for a purchase, please read the ‘Investment Trust Explanatory Document (Prospectus)’ and ‘Pre-contract Delivery Document’ or ‘Prospectus Supplementary Document’ thoroughly, and please make investment decisions on your own.

Disclosures related to the Financial Instruments and Exchange Act, etc.
SBI Okasan Asset Management Co., Ltd.
Trade Name, etc.: SBI Okasan Asset Management Co., Ltd.
Registration Number: Financial Instruments Business Operator, Kanto Local Finance Bureau (Kinsho) No. 370
Member Association: The Investment Trusts Association, Japan