Investing is the only field where you don’t have to know all the complicated ins and outs of an industry. All you need is to be patient! You can outperform the majority of retail and professional investors by doing the least amount of work.
Yep, that’s right! You can get ahead of the curve! You can invest in the share market either actively or passively.
If you don’t already know, an active investor, someone watches the market and analyses whether to put money in or pull cash out, all based on the current news and market sentiment. They have sort of a hand on approach to investing. Professional portfolio managers are often active investors. They try to get a better rate of return than the market average. They often look for patterns and take advantage of the stock market by exploiting short-term fluctuations. It requires a much deeper understanding and analysis to decide whether to buy or sell a stock. They have a team of professional stock and sector analysts who work on the same goal, which is “to beat the market.”
In comparison, a passive investor knows that ultimately you cannot time or beat the market over the long term. It may be down for a month, quarter, year or even decades at times. But over the long term, it goes up. With that in mind, passive investors choose the fund, stock or portfolio that suits their investing style and invest in the same portfolio for many years or decades. These investors have a Buy-&-Hold mindset. That means resisting the temptation to react to market highs and lows.
Pro and cons of active investing
- Portfolio managers and retail investors are not required to follow specific strategies. They can buy whatever they think poses as a good investment opportunity.
- Active investors can hedge their bets and investments against losses by deploying short-selling and put options strategies.
- They can exit stock or the whole sector if they believe that the stock or the industry is over-valued.
- Investors can manage their taxes with extra flexibility by selling the investments that are losing money to offset the gains in a financial year.
- This type of investing is good for niche markets and sectors.
- Active investing is very expensive as there is a lot of buy and selling of securities involved.
- There is a lot of risks involved as active investing tends to favour individual stocks rather than indexing.
- Active investing is more volatile than passive investing. With the expectation of better reward comes higher risk.
- Active investing does not add value to the market, and many fund managers allocate their to be similar to that of S&P500 but charge higher management fees.
- Some high flying fund managers can increase their minimum investment threshold to do business with only the sophisticated bunch.
Pros and Cons Passive Investing
- Funds with a passive investing approach typically have a lower expense ratio (fee)
- Your investment is well diversified within the market.
- Passive investing funds are very transparent in their approach and assets. In contrast, active investment funds tend to utilize a more complex group of assets to gain the upper hand on return.
- Their buy and hold strategy doesn’t incur any capital gains tax on investments.
- Because of their buy and hold strategy, investors lose their sense of independence of choice. If an investor has reason to believe that some company is overvalued and doesn’t feel comfortable that their fund is still holding on to that company, they cannot do anything. They’re stuck.
- By investing in passive funds, you can never beat the market.
- Investors don’t have the power to react to sudden market changes as their funds invest blindly into the basket of stocks.
Check out more: The Jolly Investor
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