Active vs Passive Investing: Which is the best option?

Active vs passive investing: a topic of much debate among investors. With investors constantly looking for low-cost products, passive management has grown substantially in the last decade. Today, we are going to take a deeper look at both active and passive approaches and discuss the pros and cons associated with each of these differing investing strategies.

Simply put, active investments are funds run by an investment manager who is trying to outperform the market; conversely, passive investing looks to match the performance of the index, not outperform it.

As investing strategies, active and passive couldn’t be more different. Passive investing, also referred to as passive management, is a buy-and-hold philosophy and inherently implies that no one can consistently identify and predict winning stocks over time, so instead seek to own the entire universe of stocks in a diversified manner.

Alternatively, active management involves a more hands-on approach with a greater degree of active selling and trading. The goal of active management is to outperform a market index in good times or to book losses that are less severe than a market index suffers in bad times. However, active management has recently fallen out of favor with many investors who have found its performance to be less consistent than passive management strategies after higher fees are charged.

This brings us to a significant difference between these two approaches, namely, the amount of fees that are charged to invest in the funds. Management fees for a passive fund are generally much lower than for an actively managed fund as you are not paying a team of highly trained analysts and portfolio managers to actively pick stocks. Although many actively managed funds have reduced their fees in recent years to remain competitive, they still tend to be higher than passive funds.

Those who engage in an active investing approach argue that there is more flexibility with the investments, including the ability to drop investments that aren’t performing well. There is also greater potential to outperform the market through stock picking if you are successful at picking winning companies. For this reason, active management does provide certain advantages in what are known as less efficient markets, where opportunities to hunt for mis-priced investments can lead to good opportunities.

Investors looking for passive investing ideas can choose from three options: Index Funds, Exchange Traded Funds commonly known as ETFs, and Direct indexing. Due to the simplicity of having to buy and hold a broad-based index of securities, passive investing is gaining prominence among the masses.

Before investing in the market, you should take some time to learn more about the strategies available to you. Just because passive investing sounds interesting, it might not be the best strategy for your specific financial circumstances and needs.

The real question shouldn’t be which investing approach should I use but rather, how can I leverage a combination of both strategies to get the best of both worlds? The inherent differences in these strategies offer an attractive opportunity for investors. By coupling both active and passive management approaches into your investment strategy, you can add value and diversification to your portfolio and hopefully outperform the benchmark.

If you have questions as to whether passive or active investing is right for you, please schedule a complimentary consultation at 518-406-5624 or by visiting our website at simmonscapitalgroup.com.

Thanks for watching. We’ll see you next week for another episode of Coffee and Cash.