Investing is an important part of building and protecting your wealth. But when many people think about investing, they picture a trader poring over stock market information and living or dying by the market's fluctuations. However, this doesn't have to be what investing is all about. To find the right approach for yourself, learn to understand the differences between active and passive investing. Here's what you need to know.
What Is Active Investing?
Active investing is, as its name suggests, the active management of stocks with the goal of making more money than average returns. The manager of a portfolio — which is often paid professionals but can also be the individual investor — uses their experience, training, and knowledge of the market to attempt to find the best times to buy low and sell high.
What Is Passive Investing?
Passive investing is often referred to as the buy-and-hold approach. This type of investing takes a long-term mentality rather than the short-term gain method of active investors. With passive investments, funds and portfolios are designed to match target returns of a mix of stocks and bonds. Modeling and computers do much of the work, often rebalancing funds automatically in order to meet those realistic, intentional returns.
What Are the Advantages of Each?
These two investing approaches have very different goals and results. Active investing focuses on short-term returns — realizing the biggest gain in a stock price and selling it before the price drops. Passive investing seeks to smooth out these ups and downs and focus instead on the long-term growth of a set of stocks over years instead of days and weeks.
Because you need much more skill and experience to actively invest, it's more complicated than passive investing. It also takes more effort. For this reason alone, passive investing strategies are a better fit for most Americans, their retirement planning, and asset protection.
Passive investing is also usually less expensive. In addition to paying fewer transaction fees, the lack of direct management means lower management fees. And because you hold investments for a longer period of time than active investors who buy and sell quickly, your transactions are more likely to qualify for lower long-term capital gains tax rates.
This doesn't mean, of course, that passive investing is always the better answer. Returns on investments tend to be significantly higher when the right individuals actively manage the buying and selling. Passive methods only seek to match standard returns, so they grow more slowly.
When Might You Use a Hybrid Approach?
While many investors use passive investment methods, you can implement a hybrid strategy to gain the advantages of each. As an investor learns more about the market, they may want to set up a smaller account they can use to learn how to actively manage their own stocks. By keeping this amount limited, they have the thrill and potential returns of active management without putting their overall portfolio at risk.
Active management of some of your portfolio can also help kickstart your growth. Deployed with the help of a professional manager, you may use some active investments to make up for periods of slower growth, bulk up a certain savings goal, or fund a short-term financial need.
Where Can You Get Started?
The personality, risk tolerance, and style of any investor determines the type of investing that will fit best. Whether it's active management, passive portfolios, or a combination of both, the best place to begin is by consulting the team at Presidio Wealth Management. We will work with you to identify the best approach for your money and execute it. Call today to make an appointment.