4 rules really important for passive investors to follow

We have already written about the advantages of ETFs in passive investing many times: this is “built-in” diversification, and a low entry threshold, and easy access to transactions with foreign assets. Thanks to index funds, investments have become convenient and fashionable. It may even seem that the funds have done all the work for the investor. But this is not the case. The investor’s responsibility has not gone away. To invest effectively — even with a smart instrument like ETFs — there are a few long-term investing rules to follow.

Invest with a purpose

Passive investing

And so the passive long-term investor needs a goal. Few people are able to repeat the same routine actions for years without receiving tangible rewards here and now. The goal provides the necessary motivation and the opportunity to measure your progress in concrete numbers: “I saved half of the amount to buy a house by the sea” — sounds like a good reason to reopen the broker’s app and replenish the account next month.

The goal also has a completely rational function: it is a key element of an investment strategy.

Distribute assets

Despite the fact that ETFs have diversification by definition, an effective investor with a passive strategy expands it even more and invests not only in different assets within the same market, but also in different asset classes — stocks, bonds, commodities and money market instruments.

Another important principle: you need to choose assets with low or inverse correlation. For example, gold and stocks. When a stock falls in value, gold rises, and vice versa.

Even greater diversification can be achieved by investing in the markets of different countries. Developed countries offer more reliable securities with moderate yields, while emerging markets potentially have higher yields, but also a higher level of risk.

Rebalance regularly

Depending on the goal, planning horizon and individual risk tolerance, the investor forms a strategy with the desired portfolio structure. For example, a 10-year portfolio with moderate risk

Over time, the ratio of asset classes in a long-term portfolio will change, and its risk and return will deviate from the chosen strategy. Suppose a year later, stocks rose 30% in value, gold fell by the same amount, and bonds retained their original value. This means that the portfolio as a whole has grown by 12%.

Promotions: 50 + 15 (+ 30%)
Gold: 10 — 3 (-30%)
Bonds: 40
Portfolio: 65 + 7 + 40 = 112
Growth: + 12%

At the same time, the ratio of assets in the portfolio has changed. Now stocks in it make up 58%, bonds — 35.7%, and gold — only 6.3%. To restore the balance, the investor must buy more bonds and gold, otherwise the portfolio risk will remain higher than planned.

It should also be remembered that as the goal approaches, the level of portfolio risk should decrease. A year before buying that home by the sea, you can’t afford a big drawdown due to a sudden drop in stocks. By this time, the portfolio should consist primarily of bonds.

Use tax breaks

An important factor in investor success is cost reduction. They consist of two parts: the first is the commissions of the manager, broker and the trading platform, and the second is taxes.

With the first, everything is simple. Active portfolio management involves a large number of transactions, and therefore high commissions. And even if, in the end, the fund manager was among

But the investor must take care of taxes on his own. For example, he can

Compliance with these rules allows the investor to fully exploit the potential of index funds. In conclusion, let’s say another simple but important rule: no matter what happens, you need to stay calm and stick to the plan.

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