Today in this post I will show you passive investing Vs active investing which is right for you, so let’s start.
What is the best way to invest – is it passive investing or is it active investing? – Well this question is a widely contrasting matter in the field of investments. If you are also curious to know passive investing Vs active investing which is right for you, keep reading the post in this post I shall discuss passive investing and active investing and also will let you know what is better between them.
First of all, let us understand.
What active investing is?
Active investing is the way in which you actively invest in any segment of the stock market – be it equity or futures or options or cash etc. Active investing is also present in things like mutual funds. In active investing, the investor usually keeps tracking the market in every condition throughout the trading hours or even a day.
Try to imagine the time when the stocks were traded physically at the exchange on Wall Street. At that time, every trader kept themselves indulged in the market. Though the scenario has completely changed now and we can easily invest in stocks or do trading with apps like TD Ameritrade, and Robinhood right from our home or office.
In short, when you keep analysing the market in different situations for the opportunity to buy the shares at a low price and sell it at a much higher price, you give the market your time and even if you try to become a full-time trader – it will be called active investing. And, if you are the man indulged in it, you will be known as an active investor.
If you are in a job or a businessperson, it may not be easy for you to do active investments, that’s why there are many full-time traders who can manage your money and do active investments in different kinds of shares and funds.
There are thousands of wealth managers present in the United States who can actively manage your wealth and may give you a good return. (this is absolutely not a piece of investment advice and we do not force you to appoint any kind of fund manager to manage your wealth)
In active mutual funds, a qualified fund manager manages your money and invests it in stocks where the investments may give you good returns over a certain time span.
These types of active mutual fund managers and other wealth managers analyze the market and the stocks keenly. They use data from various categories, these dates may include quantitative data and qualitative data, moreover, they use their priceless experience and manage the money. Needless to say, all the strategies they make, and all the data they collect and analyze are intended to give the investors a good percentage of return.
But, there are many people present in this field who with the help of active investments make money from the money they have. As these people do have a lot of types of data, they tend to buy stocks at a low price and when the prices get up they try to sell them at the maximum possible price. Though these types of people are not investors, rather they are called traders.
Advantages of active investing:
- Potential to earn in a volatile market
- Independence to invest in desired stocks
Potential to earn in a volatile market:
Active investors get the opportunity to invest in the market when the shares are available at a cheap price.
Independence to invest in desired stocks:
Active investors put their money in the desired stocks but passive investors usually miss this opportunity as they usually invest in bulks of stocks that may not include all their favourite ones.
Disadvantages of active investing
- More Risks
- High Charges
As you are choosing the time, the company to invest and it’s solely your money so you become responsible for the gains or losses that you generate. It is seen that many new investors for the lack of knowledge lose money at first trying to do active investment.
As a user of brokers that charge money for every executed trade, you may have to give extra fees while doing active investment. A basic study has found that the expense ratio of an actively managed mutual fund is about 10 times greater than a passively managed mutual fund.
As we have gained some knowledge about active investing let’s know about passive investing.
What passive investing is?
Passive investing is a type of investing in which you don’t actively track the market but use the help of some useful tools to invest. Unlike active investments, in passive investments, you don’t have to keep exploring the charts or fundamentals of companies.
The best example of passive investments is passive mutual funds. Passive mutual funds are a type of MF that is not managed by any professional fund manager. The passive mutual fund usually cracks the index (like S&P 500) and performs likewise.
Usually, people who own passive investment strategies tend to invest for a longer period of time compared to active investors. Passive investors do not keep themselves indulged in the market, that’s why they suddenly do not buy or sell their investments in stocks whenever big breaking news is published about that very share. In the bear market also, they tend to stick to their favourite picks.
(You should not become a passive investor if you want to take the advantage of ups and downs in the market.)
Advantages of passive investing
- Low Risk
- Lower Costs
As passive investors stick to their favourite stocks, they potentially reduce their risks. In active investment, if most of the stocks under your portfolio performed well, but only a few of them lead to loss, chances are that you have not got an expected return and in some rare cases, it may also drag your investments to generate negative returns.
Another awesome benefit of passive investment is that the charges in this segment usually remain lower than active investment.
In passive investing, as they usually track a benchmark, it becomes very transparent to track the exact return. What you see in the returns of the index is exactly what your wealth actually increases.
However, in mutual funds, the returns are always less than the exact figure because every mutual fund deducts some expense ratio to manage your wealth (and as we have discussed above, the expense ratio of passive mutual funds is very low compared to actively managed mutual funds.)
Disadvantages of passive investing
- Temporary losses
Keeping stuck to the same stocks in market fluctuation may result in temporary losses until the price receivers. In extreme cases, when a company fails to generate positive returns in longer runs this temporary loss becomes permanent and more dragging.
Active investment vs passive investment – which is good for you?
‘Don’t put all your eggs in one basket – that’s very popular advice we have habituated to hear and none but the greatest investor of all time Mr. Warren Buffett himself has said the same. This may be the best quote to answer the question mentioned above in just one way.
Well, there was controversy on that matter. Everything has its own advantages and its own disadvantages too. So it is totally on you which investment is the best for you. If you have enough time to track the market, to find the potential to enter the market in its weak condition you should try active investment strategies and it to active investments.
But if you don’t want to take greater risk with your hard-earned money, if you don’t have the time to analyse a market you should rather go for passive investments.
As far as active and passive investments are concerned, it may sound weird, but it has been found that in the long run, passive investments have made comparatively better returns than active investments. Published data regarding the average returns of 20 years shows that passive investments have beaten their active counterparts.
If you want to have the facility of both passive and active investing we have the best advice for you. What you can do is that – you can use both your active and passive investment strategies. This can help you in both ways with the advantages of the aforesaid investment types. First of all, this will minimise the risk present in active investing.