What is passive investing? Simply explained

What does ‘passive investing’ mean?

Passive investing is a long-term investment approach that focuses on building wealth gradually. Instead of trying to pick winning stocks or time the market, passive investors typically buy broadly diversified, low-cost funds—such as index funds or ETFs—that track the performance of a market index.

Passive investing has surged in popularity in recent years, especially among beginners, because it is easy to implement, requires little ongoing effort, and offers instant diversification across hundreds or even thousands of companies. The lower fees associated with passive funds, combined with their tax efficiency and historically strong long-term performance, make this approach especially appealing for those who want a simple, accessible way to invest for the future. With the help of investment apps like Peaks, getting started with passive investing has never been easier, allowing investors to use readymade portfolios to stay invested in line with the market.

What is passive investing?

In the financial world, passive investing refers to a buy-and-hold strategy. You invest in a portfolio that tracks a specific market index and hold these positions for the long term without constantly adjusting them. The aim is to replicate market performance as closely as possible rather than outperform it.

This contrasts with active investing, where fund managers or investors try to achieve a higher return than the market by selectively buying and selling securities. However, studies show that active strategies are rarely more successful than passive approaches in the long term.

The buy-and-hold method is particularly popular because it helps investors avoid emotions such as fear or greed, which can lead to ill-considered actions. In addition, you can benefit from tax advantages in certain situations, as capital gains tax is only payable when you realise your profits. (This article was written in June 2025).

How does passive investing work?

With passive investing, you buy shares in funds that track a specific index such as the DAX, S&P 500 or MSCI Europe. These ETFs invest in the companies included in the index and weight them according to the index structure.

Once you have invested, you do not need to monitor or adjust your portfolio on a regular basis. You benefit from the general market performance without having to constantly intervene. Since there is no active selection of individual securities, the ongoing costs are generally lower and you gain access to broad diversification – an important risk buffer.

Important: Even with passive investing, your capital is subject to market fluctuations. Losses are possible, especially in difficult economic times.

Advantages of passive investing

Passive investing offers many advantages, especially for beginners and long-term investors:

• Less time commitment: You don't have to deal with the market on a daily basis.
• Broad diversification: ETFs automatically spread your money across many companies.
• Low costs: Passive funds have lower management fees than actively managed funds.
• High transparency: The composition of your ETFs are always made clear and must comply to strict rules.
• Easy to get started: You can begin investing with little money and can use tools like Peaks to keep your investing habit going without much effort.

Another advantage is that the long-term strategy promotes financial discipline. Since you are not trying to guess market lows or highs, you avoid impulsive and emotion-led decisions, which are often to blame for dramatic losses in times of economic uncertainty.

Disadvantages of passive investments

Despite its many advantages, passive investing also has some limitations:

• No excess returns: Since you are only replicating the market, you will not earn more than the market return.
• Little response to trends: Passive investments are often not flexible enough to take advantage of short-term opportunities.
• Market-dependent: If the market falls, your investment also falls.
• Little influence: You can’t customise the composition of an ETF or index fund.You should consider these points before deciding on a passive strategy.

Who is passive investing suitable for?

Passive investing is ideal for:

• Beginners with little knowledge of the stock market
• Working people with little time
• People with a long-term investment horizon
• People who want to minimise costs

It is less suitable for speculative investors or active traders who specifically target short-term price fluctuations.

This investment strategy can also be a sensible option for people with a medium risk profile who are looking for financial stability and predictability. Note that Peaks is an execution-only platform that doesn’t provide financial advice.

First steps: How to get started with passive investing

Getting started with passive investing is straightforward. If you want it broken down into steps, we’ve done this for you below. Note that these are general guidelines, not to be taken as financial advice.

Step 1: First, think about your financial goals and how much risk you’re comfortable taking. 

Step 2: If you’re using a platform like Peaks with readymade portfolios, choose a portfolio that reflects the risk level you are comfortable with. If you’d like to build your own portfolio, you can choose a broad market index or a mix of indices that match your goals—these could be global stock indices or specific regions or sectors. You can do this on numerous investing platforms, including Peaks. Peaks has in-depth information about each ETF on offer via the app on the Custom Portfolio page.

Step 3: If you have chosen readymade portfolios, you could set up automated deposits next, at whatever frequency and amount suits you. If you are building your own portfolio, select an ETF or index fund that tracks your chosen index, paying attention to factors like fees, diversification, and how easy it is to buy and sell. (Of course, these factors were all considered when the Peaks portfolios were built.)

Step 4: After investing, the key is to stick with a buy-and-hold approach and add money regularly, such as every month, to take advantage of long-term growth and compounding. It’s never a bad idea to stay up to date and educated on investing in general, so you understand what is happening with your money. You can start by learning some investing terminology!

Passive investing with the Peaks app

With the Peaks app, you can invest directly in ready-made ETF portfolios. The app offers:

• Expert-built, sustainable ETF portfolios
• Easy setup of different accounts for different areas of your life.
• Automatic reinvestment of dividends
• Invest with as little as €1
• Option to invest in ETPs and ETCs such as Bitcoin, Ethereum or gold

Please be aware that Peaks is not an advisory platform and does not offer financial advice. 

Why passive investing can be worthwhile

Long-term success takes time – and patience. Passive investing rewards exactly that. If you start early and invest regularly, you will benefit from compound interest and stand to achieve solid returns over decades.

Passive investing is one of the easiest ways to invest over the long term. You benefit from the general performance of the markets without having to actively trade all the time. This strategy is particularly suitable for beginners: low costs, high transparency, little effort.

Remember: investing always carries risks. You stand to lose all or some of your invested money.

FAQ: Frequently asked questions about passive investing

What is a passive investment? An investment that is held for the long term without active trading, e.g. an ETF.

What is the difference between an ETF and an active fund? An ETF tracks the performance of an index, while an active fund is actively managed.

Do I have to pay taxes? Yes. Profits from investments are subject to tax when realised (as of June 2025)

How safe is passive investing? There are always risks. Broad diversification reduces risk, but losses are still possible.