Are you an active or a passive investor?
If those terms are unfamiliar to you related to investing, you’re not alone. In fact, for years many people considered what is now ‘active investing’ to simply be, investing—the act of buying or selling individual stocks or bonds. While most people now tend to be passive investors, it’s still important to understand the difference between the two. Doing so helps you to make an informed decision about which type of investing you—and your money—are better suited for.
Differentiating Between Active and Passive Investments
Active investing typically involves mutual fund managers making the decisions for investors on a case by case basis. This is why you will often hear that managers are taking a “hands on” approach when speaking of active investments. Additionally, they hinge on a strategy that is aggressively fluid, always aiming to beat the stock market’s average returns.
On the other hand, passive investing follows indexes of similar interests for “the long haul.” With passive investments, the strategy isn’t to trade faster than the market can keep up but instead to limit buying and selling within portfolios. While this strategy is certainly more stable, it also requires self-restraint; passive investors must resist the knee jerk reactions to market ebbs and flows.
The Pros and Cons
Here’s where it gets fun. Investors and wealth managers alike have strong opinions regarding which strategy works best. For most, there isn’t a middle of the road. Instead, proponents of either side feel that the speed at which the other operates isn’t sufficient enough to maximize profits.
The pros of active investing are clear: seek to make more money. It is also suggested that this helps to manage the associated risks, since informed managers seek to buy and sell effectively during short-term price fluctuations.
Contrastingly, those in opposition of active investing argue that the transaction costs triggered every time a stock is bought or sold negates too much of the profits. And those are not the only costs that you will incur. Additionally, fees you pay will help cover the expenses for the team actively managing your portfolio. Finally, it is also possible that due to the quickened pace, you would be responsible for short term gains taxes each year.
That’s IF the analysts are right—but a big loss if they aren’t.
For passive investors, the slow and steady strategy doesn’t require a team of analysts, and therefore it is a much less expensive venture than active. It’s also unlikely that passive investments would trigger capital gains, minimizing concerns of additional taxes.
That said, the concerns voiced by those against passive investing are that there are simply too small of potential returns. By nature, active managers crave bigger wins and the speed of passive investing proves to be too slow to beat the market for the windfalls they have set their specially-trained eyes on.
Which Investment Strategy Wins?
It’s understandable to assume that larger profits, faster, would result in more money—but you should practice caution before navigating that route. While it’s true that the power to make bold moves results in large profits at times, it’s never a sure bet and unfortunately, it can sometimes result in equally large losses. Adding in the associated fees, passive investing quickly begins to look more lucrative if you have the patience to wait.
The good news?
While opinions are clearly split, it doesn’t have to be an all or nothing situation. In fact, many successful investments come from a blended strategy of the two. Contact us today at Snow Financial Group to learn how our expertise can help guide you to which investments are appropriate for your situation. Whether you’re ready to play it hard and fast or take your time, our team can help guide you in the best direction each time.