Which is better between active investment and passive investment?
What does active investment or passive investment even mean? Why does it matter?
Okay, first let’s talk about the differences
Active investment: According to Forbes, Active investing is a strategy that involves frequent trading typically to beat average index returns.
Passive investing: Passive investing is an investment strategy to maximize returns by minimizing buying and selling according to Investopedia
To simplify it further, Active investment is a type of investment in which you are actively involved, while Passive investment is an investment strategy that does not need active trading. Most investors and wealth managers tend to pick sides when it comes to picking the right investment strategy, however, it’s all up to you as an investor.
Being an active investor involves knowing the right time to buy or sell and it is more dependent on good and analytical decision-making between good and bad investments. You as an active investor need to be able to identify an undervalued asset class, then invest in it before it becomes valuable, and at the end of the day derive a good result from such investment.
On the other hand, Passive investments are more long-term, and it’s synonymous with the HOLD approach in the Crypto market also called “the buy and hold” approach, where you make an investment and keep it to feed off the returns later.
Many investors pick a side with this approach because it’s easy to manage and doesn’t require full attention. In fact with the availability of technology, this type of investment is now automated.
So how do i know which side to pick?
Let’s consider some of the options that need to be checked to inform us which strategy to take.
ACTIVE OR PASSIVE INVESTING?
Time is an important thing to check when it comes to the best strategy to adopt. Depending on your schedule as an investor – this will inform you which of the strategy pays. If you are the type of investor that gets engaged in other things like work, family, vacation etc and end up not even having time to monitor your portfolio, then the passive investment is the right strategy for you.
But if you are going into this full-time and you have time to manage your portfolio, active investing is the best option for you.
When it comes to investment, the first thing you need to be sure of is your GOAL. Knowing your investment goals also helps pick the best strategy.
If you are investing towards retirement, the best option will be to go with passive investment, because you have more time before your investment returns are useful, and this way you still have time to get focused on other things before retirement like regular work.
But if your investment is short-term, the best strategy is an active investment. This is a good option because short-term investments are for quick returns and thus it’s better to be actively involved to monitor your gains.
Even though you can determine what strategy you want to go for based on your goals as stated above, you can also use whatever strategy you are familiar with regardless if it’s a long-term goal or short-term goal if you realize any of the strategies will maximize your returns.
INVESTOR RISK PROFILE
This is one of the most important factors when it comes to determining a strategy.
If your investment is a high-risk investment – the best strategy for this is active investments because this helps you monitor your investment and you can sell your investment at the right time. if you are an aggressive investor, active investing is the way to go.
For a low-risk investment, the suitable strategy is Passive investments.
You can make your investment and be sure your risk is at the very minimum even if you do not check for a while.
Both Active and Passive investment is great investment strategies if they are applied well.
Now the question will be which one are you? are you an active or passive investor?
You can simply automate your investments or employ a reputable investment manager like Fundquest to manage your investments while you sleep soundly/or focus on other things.