Final answer:
A passive investment strategy aims to mirror market performance and achieve returns at minimum cost, rather than chasing maximum returns at higher risk. It is suitable for long-term investors who wish to take advantage of the market's overall growth while minimizing transaction and management fees.
Step-by-step explanation:
A passive investment strategy aims to achieve returns available in various market sectors at minimum cost. It doesn’t necessarily aim for maximum returns, as this often involves taking on higher levels of risk. Instead, the focus is on reducing expenses, such as trading fees and management fees, which can erode investment returns over time.
By investing in a mix of assets like stocks and bonds, and often through mutual funds or exchange-traded funds (ETFs) that track market indices, passive strategies seek to mirror the market's performance. They are based on the idea that over the long term, markets tend to increase in value, allowing investors to benefit from this growth without the need for active management.
Investors often choose passive investment strategies when they want to invest in the stock market with a long-term perspective. Since high risk is associated with stock market investments in the short term, a passive approach is more suitable for those with a longer investment horizon where the highs and lows can even out. For instance, young workers saving for retirement might opt for mutual funds due to their lower transaction costs and potential for better returns over several decades, as compared to other options like bank accounts or bonds.