Passive investing requires less buying and selling, whereas ‘Active Investing’ requires a more hands-on approach by industry ‘experts’ traditionally. Bear in mind these experts can often lose thousands and even millions until they get a big break that lands them the commission they have been waiting on.
However, times are changing as knowledge is easily available for those that want to learn, and are willing to invest in their future. In maths, we also teach a method of problem-solving called trial and error, perhaps for some this would be a very good strategy for investing. You can now obtain simulation investing platforms from places like Trading 212 to try strategies out before going live with real money.
Passive investing has many strategies for maximizing returns by reducing the amount of buying and selling. The main long term strategy is known as a buy-and-hold portfolio strategy. This method uses a minimal trading strategy.
Warren Buffet a guru in the financial World has said regardless of the volatile movements in the stock market due to the COVID-19 pandemic, passive investing is not dead. He has mentioned 90% of the funds in his index funds is what his widow will get. He cautions people to be aware that some experts not all are more interested in sales than they are in the management of stocks and growth. Be careful, as he still suggests one method has high fees and the other has low fees, so which one will be better in the long run? He says ‘I know which side is going to win over time’.
Other advocates for passive investing often suggest, investing should be about time in the market not timing the market. Passive investment is more cost-effective, more simple to understand, and often more financially appealing when considering tax over a medium and long time interval in comparison to actively managed portfolios.
Frequent trading accrues fees, and this is what passive investing aims to avoid. It does not aim to gain from short term fluctuations in the market, or timing the market; rather from the belief the markets will inflate over time and produce positive results over time.
Passive investing is a method of not trying to out-smart the market, or short selling within the market. Instead, you simply try to go with the flow, as if you are replicating current market performance by having a well-diversified portfolio. Lots of research would be needed to have the correct portfolio, but due to index funds becoming available in the 1970s life has been made easier for us. In the 1990s, ETFs made passive investing even easier as these track major benchmarks/indices like the S&P 500.
To conclude all investing is still part of the risk versus reward module, even passive investing. Therefore, although it is less risky than some other investing and day trading strategies, it does still have some disadvantages and risks. Many index funds aim to see how an entire economy is doing and therefore track the entire market; this means when the majority of the stock market is down, so will your index funds be down. Active investing also offers more flexibility in order to outperform the market, whereas index funds are aimed to match the market rather than out-perform the market. However, should we be trying to outperform the market as novices is the question? Stay tuned as we delve into other areas in the following weeks. What side are you currently on Passive investing or Active Investing?