Deciding how to invest your hard-earned money is a big decision. Alongside choosing a reputable investment company to help handle your funds, you also need to decide whether you want to be actively involved in buying and selling securities or take a buy-and-hold approach. In this guide, you’ll learn about both methods and their pros and cons so you can make an informed choice and start your investment journey.
What is Active Investing?
Active investing means taking an ‘active’ approach to investing your money or someone else’s, such as in American and Australian equities growth funds. You might manage your own portfolio, or you might hire an experienced portfolio manager to manage it for you. The goal of active investing is to beat average stock market returns and maximize returns from short-term volatility.
There’s more to active investing than guesswork. You must take the time to do comprehensive analysis to understand when to buy or sell a stock, bond, or a type of asset. That’s why many people seeking to invest their money hire a portfolio manager. Their team of analysts relies on specific metrics and criteria to make buying and selling decisions.
Pros and Cons of Active Investing
Before deciding whether active investing is right for you, it’s helpful to be aware of the strengths and weaknesses of this strategy.
Pros:
- Flexibility not to follow a specific index
- Use tax strategies such as selling underperforming investments to offset the gains on profitable investments to potentially reduce your tax liability
- Leveraging professional analysis to find undervalued assets
- Great potential for outperformance
- Use hedging instruments like short sales and options
Cons:
- Potential to make mistakes, as fund managers are humans
- Fees can be higher than passive investing because there’s more frequent hands-on decision-making
What is Passive Investing?
Passive investing means buying and holding. You select the stocks or funds that meet your goals and sell them when you reach your goal, which might be achieving a specific cash figure, or when you need to use the money for a major life event, like buying a house.
Passive investing doesn’t necessarily mean you’re taking a hands-off approach to your money, but it does allow you to ride the waves of the market without having to actively change your strategy or pivot.
Pros and Cons of Passive Investing
Like active investing, this strategy has advantages and drawbacks.
Pros:
- Low fees, as there’s less oversight
- Lower chance of significant annual capital gains taxes
- Clarity, as you know which assets are in an index fund
Cons:
- Little to no flexibility – your holdings remain fixed, regardless of market conditions
- Returns are typically smaller than active investment strategies
- Returns track along with the index that you choose to follow, which can result in a downward price trend if that’s what the index is doing
How to Choose: Active vs. Passive
Whether you choose active or passive investing depends on your goals and preferences. If you’re an experienced investor, you may choose active investing to target niche markets or benefit from taking higher risks. If you value simplicity, are cost-conscious, and are investing for the long term, a passive investment strategy may be right for you.
Investing money requires research, planning, and, sometimes, the assistance of industry professionals. Weigh the pros and cons of both strategies, discuss your needs with an investment adviser, and start your financial journey with confidence.
