Active vs Passive Investing: An Age Old Debate

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Like the age old debate that has never been settled “Did the chicken come first or did the egg”, there’s another in the financial world “whether active investing is better than passive investing or vice versa”. Here’s a breakdown of how they differ.

 

Active Investing

Active investing is exactly what it truly means – investing actively, buying, selling, and trading stocks & securities. As an active investor, your goal is to beat the market by consistently choosing the outperforming investments. This clearly needs you to be a smarter investor than the average by being able to see into the future and choose the best.

Pros

  • If succeed to beat the market then it translates to higher returns

Cons

  • Since it is a highly involved strategy, it requires a lot of time for stock analysis and keeping up with the market movements
  • If you choose to have a fund manager to oversee your investments, then that comes at an additional cost. Just as the performance can differ greatly between managed funds, so too can the fees charged. If you choose to have a fund manager to oversee your investments, then that comes at an additional.

 

Passive Investing

Passive investing doesn’t require any special knowledge; you don’t need to be able to see into the future, or time the market. All you need to do is to invest consistently. Passive investing is often seen as a low cost and low maintenance way to invest, it tends to suit those who would rather take more of a ‘set and forget’ approach and when compared with active investors they have a lower risk tolerance.

Pros

  • Way to access the market is more affordable.
  • Your investments are completely transparent. They often exactly know where the money is and can remove and reinvest it as they please.

Cons

  • Investors are basically limited to index funds, such as an index ETF and an index managed fund.

Either way, having a clear strategy in place is a good first step in your investment journey. There are many personal behavioral factors to keep in mind, all of which may lead you to favor one strategy over the other, or perhaps a blend of both. With a deep exposure to both the strategies, you may combine both with the help of a financial advisor (0120-6223333) for the best results.