What is active vs passive investing?
Active and passive management are talked about a lot these days. With all of the rhetoric, we rarely see anyone truly going through the two strategies without pushing for an angle or adding a sales pitch to the end. This can make it difficult to wade through the noise. This hasn’t served us well, so let’s make a change. How about an article that purely delivers the facts about each method and lets the reader digest and conclude for themselves what is the best way to invest money.When discussing topics like this, authors often forget that in the end, the most important outcome from any investment strategy is accomplishing what the investor seeks to accomplish. So let’s dive in without bias and break through the fog:
Active investing management
- Active management is the use of the human element. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. Active managers believe they have the ability to outperform the market with a deeper understanding and trading style.
- Real world example: Mutual funds are an example of active management. The objective is to beat the benchmark the fund is measured against by implementing strategies and intellect into the investment process.
- Advantages of active investing management:
- With active investing a portfolio manager has the ability to adjust asset allocation based on current market conditions.
- Allows portfolio managers to better meet their clients’ specific needs by creating tailor-made strategies.
Paasive investing management
- Passive management is the belief that all available information about each aspect of a stock or market is publicly available to all investors and, although there may be short-term randomness, over time there is no advantage to timing, analysis or strategy.
- Real World example: Exchange-traded funds are an example of passive investments. These funds seek to mirror a benchmark and grow with that benchmark over time. The focus is minimizing cost through being passive in activity and letting the market dictate investment results.
- Advantages of Passive Investing Management:
- Can lead to lower fees due to use of index funds.
- Can reduce taxes on capital gains due to the “buy-and-hold” strategy.
There is no wrong way to invest within these two strategies (active vs passive investing), so once you pick a path, stay on it. The success of an investment is rarely determined by just the market but often by the ability of the investor to repeat successful habits. Fully understanding the direction you are taking is the single most important factor in your ability to remain consistent. Know thyself, invest within the parameters with which you are comfortable and remain earnest. With that, you may find yourself reaching a successful end no matter if you are on an active or passive investing path.
- Fund options can be limited for passive investing
- Potential for smaller returns for passive investing
- Can be more expensive with active investing
- Can lead to increased risk depending on the asset manager’s investment philosophy
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