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Active Investing vs. Passive Investing

Jaiya Gill

Active Investing vs. Passive Investing

Investment strategies fall into two general categories: active vs passive investing. Both can be tailored to meet different investor preferences like risk tolerance and financial goals. So what are the differences and how do you what's best for you? Let's get into it.

Active Investing

Active investing takes a hands-on approach often by a portfolio manager. It involves trying to beat the market’s average returns and take advantage of short-term price fluctuations. This is done by frequently buying and selling stocks and is usually more popular during market upheavals. It involves expertise and analyzing assets to know when to buy in or pivot out, and being right more often than wrong. 

Some benefits of an active investing approach include:

Personalization: Investors can customize their portfolio based on their personal preferences, accounting for risk tolerance, and their goals and return objectives. 

Responsiveness: Allows for an adjusted response to market shifts, like an economic downturn, reducing risk and exposure. This may also create opportunities for potential short term gains.

The downsides to this approach are:

More chances for loss: Active investing is a much more volatile investing approach, introducing more opportunities for loss.

Rarely exceeds benchmarks: It’s unlikely they will outperform benchmarks all of the time. 

High effort: More effort is needed to be put towards buying, selling, and researching investments to monitor and make regular changes.  

Passive Investing 

Passive investing is tends to be more popular amongst investors. This strategy requires a buy-and-hold mentality. It involves less buying and selling and focuses more on the long haul, like buying an index fund or other mutual funds. These investments are typically stable, but slower to realize. The average historical stock market return has been approximately 7% a year after inflation. 

Some benefits of a passive investment approach include:

Minimal effort: Passive investing is less work than active. Passive investors typically don’t make many changes and just “set it and forget it”. 

Lower risk: Patience and time is required rather than timing the market, which is less risky.

Some personalization: It can still be tailored to investor preferences just not as precisely as active investing and buying a specific company’s individual stock.

The downside to consider is:

Not attuned to short-term opportunities: Passive investors can miss chances for short term gains from market moves or trends. 

Key Differences

Passive investments have earned more than active investing historically. 

Effort level: More energy and hands on effort is required for active vs passive investing.

Averages vs timing: Passive investing is all about averages. This strategy involves riding market downturns and averaging losses with growth over-time. While active investing is all about timing. It focuses on buying low and selling high.

Long view vs short term: Active vs passive investing involves focusing on a short term vs long term view.

Ultimately, deciding which one to chose depends on personal preference. As always remember to do your own research! 

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