Active or Passive Investing? Time to Take Another Look
~ By Herb White, MBA, CFP ~
With investing, as it is with so many things in life, there often is a good reason to look again at your options. Many investors rely on a passive strategy of investing and tend to stay with it. For them, a passive strategy means less need to address issues related to those investments and therefore less stress or worry. And, while this strategy is a good idea for many individuals, it may not always be to your best advantage, especially when there is volatility in the markets as there is now. It may be time to consider an active approach to your portfolio.
Let’s look at the difference between active and passive investing, in light of today’s prolonged unstable market environment.
Active vs. passive investing: What’s the difference?
Passive investing involves limited maintenance and ongoing buying and selling, with an eye toward long-term appreciation. You may have been counseled by a passive investment manager who uses securities which seek to track the performance of a particular index, and you plan to hold on to those investments even through the market’s ups and downs. Managers who use this passive approach generally only purchase companies in their selected index. This is called “buying the market.” Basically, no changes are made with your investments until the index itself changes course. However, the potential for significant returns is lower than with active investing.
Active investing is characterized by managers undertaking extensive market analyses and company-by-company research. These active managers seek to find the best opportunities because of their research and attention. Investments are continuously monitored in an effort to exploit profitable opportunities. It is their goal to beat the market.
A misconception about active investing
Many investors want to avoid a lot of risk and believe that passive investing is a safer and therefore wiser choice for them. Sometimes, however, the opposite is true. In fact, with active investing, an investor has the ability to target his or her own risk profile more accurately, with more specific investments—rather than “buying the market.” The end result often is that the investor may have a greater ability to reduce risk in his or her portfolio while potentially achieving greater returns.
How does this work?
In general, active portfolio managers combine a company-by-company analysis along with an assessment of current economic conditions. They look for growth opportunities in the market but they also are able to spot internal issues within individual companies as well as other conditions related to the changing economy that may affect companies in their portfolios.
When the markets are volatile, as they are now, it is well worth considering an active approach. You will want a well-diversified mix of investments that takes into account your risk issues, and also have an expectation that the markets will be unstable at times and you will generally need to continue with your plan through those market upheavals.
Active investing is not for everyone. If you are significantly risk-averse and regularly concerned about the gyrations of the markets, passive investing may still be a better course for you. However, it is a good idea to consider a more active approach, rather than at times wondering why you’re not doing as well in the markets as you had hoped. Ask your financial advisor for investing pros and cons in light of your retirement goals.
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Provided by courtesy of Herb White, MBA, CFP©, a CERTIFIED FINANCIAL PLANNER™ with Life Certain Wealth Strategies, 8400 E Prentice Ave, #715 Greenwood Village, Colorado, www.lifecertain.com, (303) 793-3999. Securities and investment advisory services offered through Woodbury Financial Services, Inc. Member FINRA, SIPC and Registered Investment Advisor. Life Certain Wealth Strategies and Woodbury Financial Services are not affiliated entities.
Investing includes risk including the potential loss of principal. Indexes cannot be invested in directly, are unmanaged and do not incur management fees, costs and expenses. No investment strategy can guarantee a profit or protect against loss. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.