Striking The Balance in 2020 Between Active versus Passive Investment.

Striking The Balance in 2020 Between Active versus Passive Investment.

Summary

• A hands-on approach is required in active investment
• Passive investment requires buying and selling of mutual funds and index funds
• Active investment has become more popular in recent years.
• Both styles are beneficial ways of investing.

I would like to breathe a fresh aura into this seemingly simple question of passive management vs. active management. Which is the best? The answer will surprise you.

Since the economic rise in 2008, the active managers had a widespread under-performance. Hence the sudden renewed attention.

This debate has been going on for many years now and in the investment industry and it is the most researched topic in recent years. Personally I don’t believe their such a thing as a get-rich-quick -formula. Be in control of your hard-earned money because it’s never too early or too late.

Good mindset

The most important thing is Mindset and the next thing is Commitment to self DISCIPLINE.

I’m sure this is not new to you, where the difference between the two is that one is short term, Active Investment vs. The long term, Passive Investment.

Key strengths and shortcomings of Active and Passive investment.

Active investment is flexible and it is not essential that you follow a specific index. Advantages are you can use a hedge manager to offset potential losses or gains that may become too big risks. Whereas in passive investment you are stuck with the stocks regardless of how they are performing in the stock market.

A financial advisor can help with tax management by offsetting big investment that is losing money.

On the flip side of active investment or weakness.

1. It is an expensive venture. Since you are actively buying and selling it will trigger transaction cost and also keep in mind you are paying fees for the analysis team on the ground who are doing the research.

2. The financial advisor is free to buy any investment you project to be a rising star in the stock market but will be a bad move if it flops.

To my surprise, active investments have been on the high for the past couple of years with the increase in the projection option of EFT. exchange-traded funds.

Passive Investment, on the other hand, is for the long haul. I remember I once did it for a period of 6 months. That’s the minimal and the Strategy behind it is to buy and hold.

Let us take a look at the passive investment example of major index fund like the Dow Jones. If the indices go up, index fund automatically go up by selling the stock going out and buying the new joining index.

To be a successful passive investor the main focus will keep your eyes on the prize progressively long term.

Advantages are the very low fees, your money works for you in passive income bringing you income without being involved. Transparency and tax-efficient. The strategy used in passive will not attract tax because of the buy and hold aspect.

Weakness involved in passive investments.

1. limitations into a specific index no matter what happens in the stock markets.
2. Small returns because of the buy and hold strategy.

But these too come with there set of pros. You, as the investor is locked in holding the cause of limited to a specific index or a set of investment with no variance.

After all is said and done, passive income is still the ultimate goal.

Exclusive Considerations

Between active and passive investments which bring in more money?

If we look at the performance keenly you will note that passive investing works. Years of studies on active investments have shown disappointing results but only a small fraction of actively managed investments tells us otherwise.

Despite the overall good performance of passive investments, investors are willing to pay a higher fee for expert advice on an active manager for guidance.

A good example of active and passive investment

According to Dan Johnson who is a fee-only advisor in Ohio favors passive indexing. Here is he’s explanation, “The passive versus active management doesn’t have to be an either/or choice for advisors. Combining the two can further diversify a portfolio and actually help manage overall risk.”

For both active and passive investment, there is a time and place for many people whether actively in employment or retired.

Inclusion

To be a successful investor don’t look at investing as a way to make money fast but rather a way of long term building of wealth with gains compounded over time with low risk.

The only person holding your key to success is *YOU.*