21 Aug Active vs. Passive Strategies
If you are new to investing, one of the first decisions you’ll need to make is which investing strategy to pursue. Passive investing, which consists of buying and holding a diversified basket of stocks, seeks to minimize fees and reduce the risk of under-performance that can come with frequent trading. Active investing, on the other hand, takes a more hands-on approach. It involves deeper analysis and expertise, and aims to take advantage of price movements in order to outperform the average return of the market. Each strategy has it’s pro’s and con’s, so it’s important to consider each of them before deciding on one.
In general, active investing is a great strategy for people who a) want to grow their wealth fast, b) are comfortable taking on additional risk (i.e., they can tolerate large swings – both up and down – in the value of their portfolio), and c) have the time, energy, and expertise to invest actively or can find a trustworthy investment advisor capable of outperforming over the long-term. On the other hand, passive investing makes sense for people who a) have low tolerance for risk (i.e. they are more interested in preserving their wealth than growing it) or b) don’t have the time, energy, or expertise to invest actively on their own and are unable to find a professional money manager capable of outperforming over the long-term.
Although active investing, if done well, provides the greatest opportunity for wealth accumulation, it is also the most difficult and time consuming. And since most people don’t have sufficient free time, motivation or skill to research stocks adequately, we think investors looking to pursue an active strategy would be best served to work with an investment advisor. If you decide to go this route, its important to understand that not all money managers are equal. In fact, according to research by the S&P Dow Jones, 84% of all U.S. stock funds (which are managed by professional investors), under-perform their benchmarks over a five-year period. Therefore, finding the right investment advisor is critical. If you are interested in learning more about how to find a great money manager check out our blog post “Invest Better: How to Choose the Right Active Manager”. And if you are interested in learning more about passive investing check out our blog post “Invest Better: Passive Investing Done Right“.
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