When choosing an investment strategy for your money, it’s a given that you’re willing to take on some amount of risk. There are strategies you can adopt to make sure the risk you’re taking is minimal.
If you’re comfortable with a lot of risks to enjoy a greater reward, you need to understand that you could lose everything you put in. Of course, most of us don’t put our money on the line like that. There is a wide range of opportunities between choosing the maximum possible risk and not investing at all.
One of the ways to do this is by deciding between active investing and passive investing. But what do they mean, and why does it matter?
Active investing means remaining involved in the trading process by actively buying and selling your investments. The individual managing your portfolio will decide what you buy and sell, reacting to the market conditions. The aim is to get ahead of the market by making smart choices leading to significant gains.
That may mean you are doing this yourself or hiring a portfolio manager’s services. Either way, someone is keeping track, and you’re putting your trust and faith in their ability to detect opportunities to make significant gains quickly and move your money appropriately.
On the other hand, passive investing is a strategy that aims to make a steady profit with fewer buying and selling moves. It’s cheaper because nobody needs to manage your portfolio to make short-term earnings. Instead, you pursue a buy-and-hold strategy to hold your investment in a broad market index with a long-term gain approaching.
The goal isn’t to acquire a profit through taking advantage of market variations or getting lucky with timing. Instead, you’re trying to match the market by creating a well-diversified portfolio that will track well over time.
Which one earns the most money?
This depends on how long you want to invest. Sometimes a portfolio manager may spot a diamond in the rough and invest at the right time, and the investor will make impressive gains quickly. However, over time, passive investing tends to have larger gains.
In this circumstance, the extra fees you would pay a portfolio manager are well worth it. However, it’s not a typical occurrence to strike it rich in the stock market.
Who is each type of investing for?
There are no rules about who should invest in what. However, a combination of active and passive investments would be worthwhile if it’s financially practical for you.
Investors with a higher tolerance for risk, such as those with extra cash, are typically more attracted to active investment because the potential profit is more appealing. The additional fees associated with having a portfolio manager aren’t an issue for them.
Passive investments are usually the way to go for most of us. Their track record is proven; they are straightforward, low-maintenance, and most importantly, they come with less stress.
Active and passive investment strategies both have a place in a healthy portfolio and can be undertaken by anyone looking to enter the market. A passive investment strategy will be more favourable if you want to do something low-risk with a chance of a healthy return.
If you have any questions, feel free to Join the conversation…