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Passive and Active Investing

Jun 23 2011

Bull and bear in front of the Frankfurt Stock ...

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It is so difficult to predict the fluctuating financial market; therefore, it is a challenge to know how to invest your money. You can be a passive investor, or you can be an active investor.

Active investing consists of researching and strategizing your approach to the investment. You will pick and choose which funds to invest. This takes time and patience and lots of work on your part. You will need to analyze the market to find the best opportunities for investments.

Active investing is contingent on the fact that prices react to information slowly enough to permit the investment to surpass the market. You will research to determine individual shares or securities to become part of your portfolio.

You take advantage of the market trends and manage your risk. Active investors will produce returns that do better than a benchmark index. The goal of active investing is to outdo the stock market. If your strategies are successful, you will gain higher returns.

Some funds might do great, and others will be a bust. When taking the active approach, you should thoroughly research the performance histories. There are resources online which will show you a wide-range of categories and the performance of the fund in each category.

Passive investing is based on the fact that the market is too difficult to predict. Rather than picking the best investments, passive investors believe that market returns can be parallel with a buy and hold strategy. The cost of passive investing is lower than active investing, with the risk also being lower. However, the returns might not be as high.

There is no analysis or research required with passive investing. Fewer trades are made; therefore, the cost of trading is lower. Your portfolio is designed to duplicate a popular index that normally generates returns. This type of investment guarantees that you will collect the same return that the market or index receives, minus any transaction fees.

Deciding whether to be an active or passive investor is not easy. Both require self-control and discipline on your part. You will need to keep track of your portfolio, so you can see how things are progressing with your money.

You need to determine your goals and then decide whether you want to be an active or passive investor. Determine what is best for you, so that you can achieve your ambitions and dreams. You will make mistakes, but you just need to learn from those mistakes and move on.

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