The power of passive investing
Most people think investing is about picking the next hidden stock or outsmarting the market. In reality, the most successful investors often do the opposite: they buy the whole market and just hold it for years. Without selling.
What is a Stock, Really?
When you buy a stock (also called “equity” or a “share”), you are actually buying an ownership certificate in a company.
If a company has 1,000 shares and you own 1, you literally own 0.1% of that business. That includes its supplies, its patents, and its future profits. When the company does well, your shares increase in value. You still have that one share, but its value has increased.
How Do You Actually Make Money?
There are two primary ways your investment puts money in your pocket:
Capital Appreciation (Buy Low, Sell High)
This is the most common way people think about profiting in the stock market. You buy a stock and then you resell it when it reaches a higher price, profiting on the margin.
Dividends
Established companies (like Coca-Cola or Apple) don’t need to reinvest every penny they make back into the business. Instead, they take a portion of their profits and send it back to the shareholders as a cash payment.
In an index fund like the S&P 500, you get both. You benefit from the price of the 500 companies going up and you collect the dividends from all of them simultaneously.
ETFs And Indexes
Yes, there are instruments in the stock market that allow you to buy a set of companies and become a shareholder in all of those companies at once.
Before you invest, you need to know what you’re actually buying. People often use these terms interchangeably, but they are different things. I will make it short and to the point. You can read more online if specific topics pique your interest.
For this example, let’s take one of the most (if not the most) popular choices: The S&P (Standard & Poor’s) 500.
The S&P 500 is an index. In other words, it is a list of the 500 largest companies in the US. S&P is just a company that’s managing this list. You can’t “buy” the S&P 500 directly because it’s just a list.
An exchange-traded fund (ETF) is an investment product that holds a collection of assets, such as stocks, bonds, or commodities. ETFs are designed to track the performance of a specific index (like the S&P) or sector.
A few popular S&P 500 ETFs you’ll likely encounter are VOO (Vanguard), SPY (State Street), and IVV (BlackRock). They all track the same index but have slightly different fee structures. Worth comparing before you pick one.
The Magic of Compound Growth
The magic of how this works is called compound growth. Let’s say I have an investment that has an average annual return of 10%. That means I will sometimes get a 20% profit when selling, and in some years I will actually lose money or remain neutral. But again, if I have an average annual return of 10%, I can just leave the money there and let that yearly return grow.
Before you ask, yes, there are investments with an annual historical rate of 10% - The most popular among them being S&P 500 ETFs or index funds.
Let’s see some numbers. Let’s start investing today:
Year 1: You invest $1,000. It grows 10%. You have $1,100 in your investing account.
Year 2: Your $1,100 grows 10%. Now you have $1,210 in your investing account.
Year 10: That $1,000 has quietly grown to around $2,594. Still without doing anything.
Year 20: Now you’re looking at roughly $6,727.
Year 30: That original $1,000 could be worth over $17,000 without you ever adding another cent.
You can search a compound interest calculator online and double-check this math. Notice how the jumps get bigger over time. That’s the compounding effect accelerating. The longer you stay in, the more the math works in your favor.
Quick Summary
This is exactly what makes passive investing so powerful. You’re not betting on one company to win. You’re betting on the economy as a whole to keep growing. And historically, over long enough time horizons, it has. You don’t need to be smart about which stock to pick. You just need to be patient.
This is the first time I am introducing financial stuff into the blog. I will probably make another post soon that tackles more of this stuff and goes a little more in-depth. Check out the investing tag for more.