Active and passive investing are two different approaches that people use as their investment strategy. Each has advantages and disadvantages, and you should be aware of these considerations so you can see how they could work for your portfolio.
No such thing as one being better than the other but it’s always best for investors to understand their similarities and differences. You can consider using both to help you reach your goals in a way that fits your needs and situation.
Passive Investing: Less effort
Passive investing is a strategy in which you put your money in one or more investment products and hold on instead of constantly trading them. This is done with the hope that the investment will increase in value over time or maintain its value while providing income through interest payments or dividends.
In general, people who do passive investing are after gradual but consistent growth. Passive investing is usually done for the long term, because giving more time lowers the chances that the investment will be greatly affected by the usual market fluctuations.
For this strategy, short-term gains and losses aren’t much of a concern, because it is based on the expectation that the market will go up in the future.
One way of doing passive investing is by tracking an index (for example, the PSEi). By shaping your portfolio to follow the index’s composition, you will hopefully achieve the same performance. You may also choose to invest in an index fund or an Exchange Traded Fund (ETF) that follows an index.
Passive investing isn’t very complicated. After making the initial investments, all you need to do is check on your portfolio’s performance and rebalance when necessary. This means that you won’t have to follow news and constantly make trades.
Compared to an active investing strategy, the gains from passive investing aren’t likely to be as high but the risk of losses may be lower. Also, the lower number of transactions you’ll be making means that you will be paying less in terms of fees.
If your situation, goal, or risk profile means that you would be sensitive to short-term drops in the value of your investments, passive investing might not be the right strategy for you. If done by following an index in your portfolio, this type of investing is also vulnerable to market risk.
Active investing: High potential
As the name suggests, active investing means that you will be actively managing your investments. How this is done depends on the specific asset class. In the stock market, for example, you can buy individual stocks and set a price that you will sell them at.
To do active investing, you’ll need to find assets that have good potential for short-term profits. Some people who do this strategy try to get more returns than the market as a whole does.
This way of investing has high potential for returns because you can react quickly to market changes. However, you’ll need to put in a lot of time and effort, especially when it comes to doing research and understanding trends. Because you make much more transactions when you do active investing, you will also end up spending more on fees.
Active investing carries its own set of risks, especially if you misjudge market conditions. For example, you might sell shares of a company when their value dips only to see it rise past the original price you paid. You could also quickly move money from one product to another but then suddenly experience a loss.
In general, active investing should be done only by people who have a lot of experience in investing and understand the market enough to recognize opportunities for profit and loss.
