Trying to balance active and passive investing styles - MoneySense (2024)

FAQs

Can you do both active and passive investing? ›

Depending on the opportunity in different sectors of the capital markets, investors may be able to benefit from mixing both passive and active strategies—the best of both worlds, if you will—in a way that leverages these insights.

In simple terms, active investors attempt to outperform the returns of a specific benchmark, whereas passive investors accept the market return by tracking a specific index.

Passive management generally works best for easily traded, well-known holdings like stocks in large U.S. corporations, says Smetters, because so much is known about those firms that active managers are unlikely to gain any special insight. “You should almost never pay for active management for those things.”

As shown in FIGURE 1, passive large-blend strategies outperformed active large-blend strategies for eight consecutive years leading up to 2022 before outperforming again in 2023.

Passive investing methods seek to avoid the fees and limited performance that may occur with frequent trading. The goal of passive investing is to build wealth gradually. Also known as a buy-and-hold strategy, passive investing means purchasing a security to own it long-term.

The analysis process often depends on the investing style you're employing. We'll briefly look at three different styles of investing: value, growth, and income.

Active investment is a form of investment strategy that involves actively buying and selling assets in the hope of making profits and outperforming a benchmark or index. An example of an active investor is a hedge fund manager, who constantly monitors the market and trades when they see an opportunity to make money.

What are the problems with passive investing? ›

Once that decision has been made, there may be reasons for adopting passive investment approaches, but investors should realise that they may face unforeseen risks. These include undesirable concentrations of stocks, systemic risk and buying at too high valuations.

Active management requires frequent buying and selling in an effort to outperform a specific benchmark or index. Passive management replicates a specific benchmark or index in order to match its performance. Active management portfolios strive for superior returns but take greater risks and entail larger fees.

Passive investors buy a basket of stocks, and buy more or less regularly, regardless of how the market is faring. This approach requires a long-term mindset that disregards the market's daily fluctuations. Similarly, mutual funds and exchange-traded funds can take an active or passive approach.

Passively managed funds include passive index funds, exchange-traded funds (ETFs), and Fund of funds investing in ETFs. These funds follow a benchmark and aim to deliver returns in tandem with the benchmark, subject to expense ratio and tracking error.

By mirroring a benchmark index, passive funds diversify investments, enhancing stability and risk distribution. Passive funds typically entail lower risk levels than actively managed counterparts, appealing to conservative investors or those with long-term investment goals.

It is okay to do both, and it depends on the risk-taking ability and patience of the person to choose between either of these or both of these. Investing is long-term and involves lesser risk, while trading is short-term and involves high risk.

The downside of passive investing is there is no intention to outperform the market. The fund's performance should match the index, whether it rises or falls.

Passive investment products have long been pulling in the lion's share of money from investors, but as 2023 came to a close they achieved a milestone: holding more assets than their actively managed counterparts.

Non-income-producing assets.

Investing can be a great way to generate passive income, but only if the assets you own pay dividends or interest. Non-dividend-paying stocks or assets like cryptocurrencies may be exciting, but they won't earn you passive income.