Passively investing $1000 a month could net you $3.84 million

There’s a proven way to maximise your money that’s really boring – but the results really do speak for themselves.

There is so much noise out there around investing, it’s almost impossible to know who to listen to or who to trust.

And our psychology works against us. You want to shoot the lights out with every investment you make, make a heap of money, and ride off into the sunset retiring in your 30s.

This makes it really hard to make smart moves when you invest, and it’s common to end up choosing investments that have more risk than what you actually need, causing stress and increasing the risk of setbacks and mistakes.

It’s also common where you don’t have the right investment approach that you don’t have the confidence to invest as much money as you can (or should).

The ultimate result is slower progress building your assets and investment income, creating an opportunity cost that compounds for years and decades into the future.

The reality is that choosing good investments can actually be pretty easy. In fact, the statistics show us there are some reliable investments that perform best 95 per cent of the time.

These investments aren’t super exciting, but they are super effective. And having helped people with this for years, I can tell you that boring is profitable.

Passive investing

Passive investments are investments that have been designed to track a specific share market or market sector. For example, an ASX200 index fund tracks the performance of the entire 200 largest companies in the Australian share market.

Because a passive fund is simply tracking the market overall, the return on this investment is almost identical to the return on the market.

Boring investments can reap great rewards when done correctly.

This means your investment won’t perform better than the market, but it also won’t perform worse. And the only way the value of an index investment can go to zero is if every single company goes bust at the same time.

This means when you use an index investment you can benefit from the peace of mind of knowing your investments are doing exactly what the share market is doing.

Active investing

Active investing is where you have an investment manager, research house, or sometimes even a computer algorithm that’s choosing investments. The investment objective for active funds is typically that they’re looking to perform better or differently to the market.

The big challenge with an active fund is that unfortunately nobody has a crystal ball and we can’t predict the future. These funds look to make smart decisions and choose investments that will perform well, but ultimately they’re just hoping that their predictions are right.

Active investing is when you choose investments rather than track a share market. Picture: iStock.

The other complications with active funds are twofold, the first is that human behaviour and sentiment are big drivers of markets – and humans are unpredictable.

The second is that actively managed investments are much more expensive to run than their passive counterparts, mainly because the costs of running an active fund are significantly higher – specifically research and marketing costs along with the salaries of the executives that run these funds.

Choosing between active and passive investing

Both active and passive investments have their advantages and disadvantages, and ultimately the right choice for you depends on what you’re looking to actually achieve from your investments.

But the statistics show that passive funds tend to win on balance over the long term.

The recently released end of 2021 S&P Index vs Active (SPIVA) report from Standard & Poors (one of the largest global investment ratings houses) analyses the performance of all actively managed funds compared to their passive (or index) counterparts.

The statistics are compelling, and show that the majority of actively managed funds underperform their passive counterparts.

The report also shows that for Australian share funds, over 80 per cent of actively managed funds underperformed their counterparts over the last 15 years, and when you look at international share funds, the number of underperforming funds increases to over 94 per cent.

The implication for investors is that when you invest into actively managed funds, you have a high chance of underperforming.

This can mean your investment journey is a more stressful one as you ride out periods of below average performance, and ultimately you suffer from slower growth of your investments and wealth.

Compare this to passive investment returns. Based on the ASX long term investing report return showing the long term return on the Australian share market of 8.7 per cent, starting with $0 today and investing $1000 per month, your money should grow to around $180k, $600k, $1.56m, or $3.84m over 10, 20, 30, or 40 years respectively.

Looking at these returns coupled with the statistics that show the underperformance of active funds, the argument for passive over active investing seems like a compelling one.

The wrap

Investing can be hard. It can be complicated. And it can be stressful. But it doesn’t need to be. When you stick to the fundamentals, keep things simple and avoid the hype and noise, it can be easy.

Choosing between active and passive investments is one of the biggest drivers of the results you’ll achieve from your investments over time, so choose wisely.

Ben Nash is a finance expert commentator, podcaster, financial advisor and founder of Pivot Wealth, and Author of the Amazon Best Selling Book ‘Get Unstuck: Your guide to creating a life not limited by money’.

Ben has just launched a series of free online money education events to help you get on the front financial foot. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.