What's the Difference between Active Investing and Passive Investing
Active investing and passive investing are strategies that investors and wealth managers use on their portfolios. In this video, we run through the basics of each strategy.
Active Investing:
As its name implies, active investing takes a hands-on approach and requires that someone act in the role of a portfolio manager
The goal of active money management is to beat the stock market’s average returns and take full advantage of short-term price fluctuations
It involves a much deeper analysis and the expertise to know when to pivot into or out of a particular stock, bond, or any asset
The advantages of active investing:
Active managers aren’t required to follow a specific index so there is much more flexibility
Active managers hedge their bets using short sales or put options
Advisors can tailor a tax management strategy to you
The disadvantages of active investing:
Expensive to manage
Higher risk
Passive Investing
If you’re a passive investor, you invest for the long haul—passive investors limit the amount of buying and selling within their portfolios, making this a very cost-effective way to invest
This strategy requires a buy-and-hold mentality
The prime example of a passive approach is to buy an index fund that follows one of the major indices like the S&P 500
The advantages of passive investing:
Low fees since oversight of your portfolio is much less
It is always clear which assets are in an index fund
It is relatively tax efficient since the buy and hold strategy doesn’t typically result in a massive capital gains tax for the year
The disadvantages of passive investing:
Very limited to specific index or a predetermined set of investments
Small returns
If you would like to learn more about how we manage investments at Client First Capital, we invite you to connect with us by sending an email or filling out our contact form.
