Active vs. Passive Investing

Active investing refers to closely managing a portfolio to take advantage of market fluctuations. Active investors keep a persistent eye on their portfolio, selling when the price is high and buying when the price is low. Active investors can make a quick buck from split-second decisions. The goal is to beat the market by playing the market.

Passive investing takes a more relaxed approach. Passive investors typically hold on to their investments for a longer period (called ‘buy and hold’), looking to make a steady return that matches market movements. They may purchase an index fund and allow their wealth to grow along with the market. They’re less reactive to market changes, instead, relying on the growth of the economy to buoy their investments.

As for which approach delivers better returns, the verdict is inconclusive. Some sources claim actively managed funds perform better overall, while some claim that passive investing consistently outperforms active investing in the long run.

Active investing could result in faster, short-term, above-market profits. With the right moves, you can profit during booms and busts. For the same reason, a lot more work goes into active investing because it requires constant monitoring and research. It also involves higher fees if you get a professional to do the work for you. But you can keep costs down by paying the brokerage fees and trading on a platform by yourself. You must also have an appetite for risk as the stakes are high.

Passive investing gives average market returns. If an index is doing well, your investments will do well. The downside is that passive funds are vulnerable to downturns. If the market is underperforming, your investments will take a dip too. Passive investments can be left mostly on their own. Investors don’t have to keep following the market (but always keep an eye on your investments – passive or active!) and passive funds do not require active management. Hence, passive investing costs less than active investing.

If you have a lot of time and interest to do research and manage your portfolio, active investing might be your calling. If you’re content making as much as the market is making, then passive investing will satisfy your needs. That said, it’s not an either-or option – you can do both at the same time! You can spread your risk by choosing a mixed portfolio, where passive investment options are for longer-term, and active investment avenues are for short-term, quick earnings, by switching funds based on their performance.

In short, if you’re well-read in a certain type of investment, you can actively invest in that. For investments that you’re not confident about, you can rely on passive funds and let it do the work.