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Active vs. Passive Investing: Which is Better?

Active vs. Passive Investing: Which is Better?

October 04, 2023

Investing is an important part of financial planning, especially when it comes to retirement. There are two main approaches to investing: active and passive. Investors tend to align themselves with one strategy or the other, often finding themselves at opposing ends of the investment spectrum. So, what’s the difference, and why is it so contentious? Both have their advantages and disadvantages, so it's important to understand the differences between them before deciding which is best for you. In this blog, we'll explore the pros and cons of active and passive investing, so you can make an informed decision about which is right for you. Let’s dive in.

What is Active Investing?

Active investing is a strategy that involves actively managing a portfolio of investments in order to achieve a desired return. It requires a hands-on approach, with a great deal of research and analysis, as well as a deep understanding of the market.

Active investing is driven by a desire to “beat the market” and outperform specific benchmarks, such as the S&P 500. Portfolio managers actively analyze economic, political, and investing trends to make buy or sell decisions.

However, it’s important to note that active investing often incurs higher fees over time. When portfolio managers buy and sell securities regularly, they charge additional fees to cover their services and the research professionals who support them.

What is Passive Investing?

Passive investing has gained popularity due to its low-cost simplicity. This strategy involves replicating the performance of a broader market index, such as the S&P 500. By doing so, passive investors seek to capture overall market returns instead of trying to outperform the benchmark.

It involves investing in a diversified portfolio of stocks, bonds, and other assets, and then holding them for the long-term. This approach allows investors to benefit from the long-term growth potential of the markets, which avoiding the costs and risks associated with actively managing investments and trying to "time the market".

Passive investing is a great way to save for retirement, as it allows investors to take advantage of the compounding effect of their investments over time.

Which Investing Strategy is Right for Me?

Deciding between active and passive investing ultimately comes down to personal preference and financial goals. It’s important to assess your risk tolerance, investment objectives, and timeline before making a decision.

Active investing may be suitable for those who are willing to take on more risk. Passive investing may be suitable for those looking to play the long game and minimize risk.

Invest Smart with a Certified Financial Planner

Both active and passive investing strategies have their merits, and it' essential to delve deeper into their nuances. By doing so, you can better understand the advantages and drawbacks associated with each approach.

If you would like to learn more about active and passive investing, out financial experts are happy to provide additional information and guide you on the right path. Call us at 614-408-0004 to schedule an appointment today.