Which is better, active or passive investing? Anyone familiar with the remote investment community will know that this particular topic is an ongoing debate. And that. The debate has intensified in recent years.
In reality, the best form of investment depends on your investment goals.
With that in mind, let’s take a closer look at the details of passive versus active investing. Once you have the information you need, it’s up to you to decide which one will fit your portfolio better.
Passive vs. active investing
First things first, it’s important to understand what the terms passive investing and active investing actually mean. Let’s start with the basics.
What is passive investing?
Passive investing involves a hands-off approach. As a passive investor, you are likely to invest for the long term. With this, you may not be interested in making regular trades for short term profits. Likewise, don’t try to beat the market with sophisticated investment strategies that require constant portfolio updates.
Instead, passive investors want to build their investments and leave the rest to the market. They usually invest in index funds that track certain market benchmarks. Essentially, passive investors stick to the idea that time in the market is better than the timing of the market.
Of course, that doesn’t mean that passive investors ignore their portfolios completely. In fact, regularly rebalancing the portfolio is an important part of any passive investment strategy. However, passive investors are likely to only review their portfolio once a quarter or less.
What is active investing?
Active investing involves a more practical approach. With an active investment strategy, an investor or his asset manager constantly monitors the market. As the market fluctuates, the investor looks for ways to improve his portfolio.
Typically, active investors are preoccupied with short-term gains. An active investment strategy requires a significant amount of time and research to outperform the market.
Unfortunately for active investors, the vast majority are unable to outperform the market. According to the S&P Dow Jones Indices, over 75% of actively managed funds failed the market over a five-year period. And that number gets worse over time: at 10 years old, 85% won’t beat the index and at 15 years old, 92% can’t beat the index …
Active vs. Passive Investing: Pros and Cons
Every investment strategy has advantages and disadvantages. Here’s a closer look at the pros and cons of these investment styles.
Benefits of passive investing
Passive investing has several benefits, including:
Disadvantages of passive investments
As with all financial strategies, there are some drawbacks to be aware of with passive investing. These include:
Benefits of Active Investing
There are a few potential benefits of active investing. These include:
Disadvantages of active investing
As with all financial strategies, there are a few drawbacks to active investing. These include:
Passive Vs. Active Investing: Which Is Best For You?
Both passive investing and active investing can be suitable strategies for investors. However, it is up to you to decide which option is right for you.
If you want a hands-on approach to investing, a passive style is a better choice. You can expect reasonable returns that are in line with the market average over the long term. Plus, you can make sure you don’t overpay for mutual funds or ETFs.
On the other hand, if you want to create a personalized investment experience and have the time to embrace this strategy, then active investing might be for you. Even investors with a short-term mindset could benefit from an active approach.
Before diving into an active approach to investing, take some time to learn the basics. Without a basic understanding of the stock market, it is better to stick with a passive approach until you have enough time to learn this skill.
As an investor, a passive or active style may best suit your needs. It is important that no form of investment is directly better than the other. However, each strategy will better suit the needs of a particular type of investor.
Before deciding which one is best for you, take some time to consider your investment goals. Do you need help deciding which investment strategy is right for you? Take a look at our ultimate guide to investment strategies.