While passive investing traditionally focuses on assets like index funds and ETFs, you might be wondering whether individual stocks can still have their place in a passive investor’s portfolio. The short answer is yes, they can, but the long answer is a little more complicated. Here’s what you need to know.

In its most basic sense, passive investing is largely about investing in broad market indexes, such as ETFs and index funds , that track the overall performance of the market. The goal of passive investing is not to outperform the market, necessarily, but to match its returns over time.

The “passive” part of passive investing refers to the way these investors handle their portfolios. Instead of actively picking individual stocks, frequently adjusting their portfolio and rebalancing, they instead adopt a “buy-and-hold” approach. This is where they select their chosen assets and hold them for the long haul.

Due to this relative lack of trading activity, passive investing is typically pretty low-cost, because you’re not constantly paying brokerage fees. Plus, these kinds of assets are usually passively managed . Passive investing is also very simple because it generally doesn’t require as much time spent on research and portfolio maintenance. Nor do passive investors usually try and time the market.

And by prioritising assets like index funds and ETFs, passive investing can offer diversification – these assets allow investors to put their money in multiple securities in a single transaction.

Can passive investors buy individual shares?

Stock picking is generally considered an active investing strategy . Those who adhere to it often try to outperform the market by selecting the most optimal stocks and trading them at the most optimal times. This approach is at odds with the passive investing philosophy for a few reasons.

First, it can be costly to actively invest in individual shares because they tend to require frequent trading, resulting in spending more on fees like brokerage. Stock picking can also be trickier to execute as it requires extensive research and a much more active role in managing shares. Passive investing is, by its very nature, a fairly hands-off way to build wealth.

Lastly, there’s concentration risk to consider – where the performance of your investments may be solely reliant on just a few companies.

All of this being said, passive investors absolutely can – and do – still buy individual shares. While individual shares can come with greater risk and not every passive investor will favour them, they can have a place in a passive investor’s portfolio. It all comes down to their approach.

See, buying individual stocks doesn’t automatically make someone an active investor. A key tenet of passive investing is the idea that assets should be bought and sold minimally. As such, it’s entirely possible for someone to invest in individual shares and hold on to them for an extended period.

They could believe a particular company is poised for long-term growth, then choose to invest in it. Or, they might construct a portfolio of shares that mostly correlates with the holdings of a particular index – such as the ASX200 – but has greater personalisation by adding or eliminating certain stocks. They may also seek to balance the steady and predictable returns of their index fund with the possible rapid growth of high-growth assets like shares. This strategy is often referred to as a core-satellite approach , and we'll discuss it further below.

What are the possible advantages of buying individual shares?

Let’s explore in more detail some of the possible reasons a passive investor might buy individual shares.

One of the main advantages of individual stocks is that they have the potential to outperform the market, possibly leading to higher returns. Stock picking gives investors the chance to capitalise on market opportunities – such as rising industries or new technologies. It might also allow them to invest in undervalued stocks – that is, shares trading below their “true” value. Of course, these potential opportunities also often come with higher risks, which is why it's important to ensure your investing strategy aligns with your risk profile.

Another reason is that an investor could be after greater exposure to a particular company, industry or sector. Focusing only on index funds or ETFs, on the other hand, could mean more diluted exposure to a certain share.

Investors may also seek greater flexibility in how they construct their portfolio. With index funds and ETFs, there’s basically no room for personalisation, whereas by buying individual stocks, passive investors can add a more tailored approach to their portfolio.

For investors who are looking for a passive income source, they might invest in individual shares that pay dividends . It’s certainly possible to earn dividend income via dividend-paying ETFs , but they often may seek to supplement it via individual shares (whilst also assuming the risk they entail).

Speaking of... what about the risks?

Stocks are inherently more volatile because their performance mostly hinges on the success of one company. Assets like ETFs and index funds contain a basket of securities, so if the performance of one holding dips, others in the portfolio may help offset any losses.

There’s also the chance that a single stock could underperform the market, whereas an index fund or ETF tends to capture overall market performance. (Although it’s worth mentioning that passive investing isn’t immune from market downturns. These funds mirror the wider market’s performance, meaning they’re subject to the same fluctuations as the index they track.)

Buying individual shares can also take up a lot of time and energy. You need to research which companies to invest in, track their performance and stay vigilant in monitoring your portfolio.

Then there’s the simple fact that leaning heavily into stock picking may deviate too far from a passive strategy. Passive investing is big on diversification, and putting your money into a single stock could mean missing out on big chunks of the market that an index fund or ETF captures. It might also increase the temptation to try and time the market , which is a notoriously difficult and often unsuccessful endeavour.

Four ideas for passive investors interested in individual shares

Looking to integrate individual stocks into your passive portfolio? Here are a few ideas to mull over:

• Think about your ideal allocation: If you’re keen to stick to a largely passive strategy, with a bit of room for stock picking, consider what your ideal allocation looks like. This is where the core-satellite approach could be helpful. The strategy revolves around the idea that the bulk of your portfolio should be made up of fairly stable assets with a smaller proportion dedicated to more speculative ones. This may help mitigate risk, as the majority of your portfolio can help offset any losses from more volatile investments. For instance, you might choose to dedicate 80% of your portfolio to index funds and ETFs and the remaining 20% to individual shares
• Keep diversification top of mind: Given diversification is one of the key pillars of passive investing, ideally you want to invest with it in mind – even when buying single shares. Consider spreading your money across different sectors, industries, asset classes and geographies to limit your exposure to just one
• Focus on certain types of shares: We’re not telling you what you should and shouldn’t invest in. But many passive investors like to go for more established shares that tend to be less volatile. These include blue-chips and other large-cap stocks . Dividend-paying shares can also be popular, as they can provide a passive income source (which could be valuable during periods of volatility) and these dividends can be reinvested , helping with compound growth
• Maintain a long-term view: Regardless of the shares you do (or don't) invest in, keeping a long-term view may help you avoid emotional decisions like panic selling during short-term fluctuations . Look for shares you’re happy to hold on to long term, and that align with your overall strategy

Striking the right balance between passive investing and picking stocks

While stock picking isn’t a core principle of passive investing, that’s not to say it’s off the table for passive investors. In fact, there are many reasons they might choose to integrate individual stocks into their portfolio. These include the potential for decent returns, higher exposure to particular companies, greater flexibility and the benefit of passive income via dividends.

It comes down to being mindful of the risks of individual shares and being strategic about the types of shares you go for and how much of your portfolio they make up.

You should also consider your financial goals, risk tolerance and investing horizon before making any investment decisions, as these will help guide what you choose to invest in. And, if in doubt, consider reaching out to a licensed financial adviser for support.

Happy investing!