If investing is on your radar, the question of whether it should be an active or passive investment must’ve crossed your mind. This ever-evolving debate has a different conclusion for all. So, we must dig deep and comprehend these terms thoroughly before jumping to any conclusion.
Every investor picks what to invest in as per their investment budget, goals, risk appetite, etc. But whatever they choose, will broadly be put into motion as either an active or passive investment.
Active Investing is an approach that requires you to put in conscious effort to stay on top of the market for buying and selling securities. The goal is to create a strategy that enables you to earn maximum returns by trying to beat the market performance through dynamic investing.
If done right, Active Investing can yield good returns in a shorter span, but the shorter the span the greater the risk. To balance this risk, one needs to master stock picking and market timing.
It is deciding the stocks which one should invest in. Choosing 1 stock out of the top S&P 500 is as difficult as finding a needle in the haystack. And the only way to do it right is by systematically analyzing growth, profitability, and the macroeconomic factors of each stock.
This is what makes FOMO in Active Investing so real! It’s not everyone’s cup of tea to accurately predict the growth of securities and intelligently take the risks, but the ones who have mastered it are called ‘Fund Managers’.
Fund managers help individual investors to take the tough decisions accurately, but this expertise comes with a hefty price tag. Therefore, even though the profits in Active Investing may be significantly higher, it is also costlier to manage.
Unlike Active Investing, Passive Investing does not require you to be actively involved in buying and selling securities. Instead, you can just relax as it does not require your frequent attention.
This strategy is a safe haven for those who wish to invest but don’t feel confident enough to do so. Passive investment is the right fit for you, if:
Let’s first talk about beating the market with Active Investing!
🤸🏻 ♀️ My Investment! My rules!
It gives you the flexibility to invest in high-performing securities and let go of underperforming ones anytime.
🤞🏻 You may get lucky!
Higher and quicker returns can certainly be counted as a pro.
📊 Risks can be mitigated
Investment is all about risks. But one can minimize risks by balancing one transaction with another.
💸 Hefty amount to be paid!
Apart from the hefty amount invested, people who prefer Active Investing also pay for fund managers and other resources like research.
😵 💫Risk is Active Investing’s middle name!
There is a good chance that you’ll earn, but the risk of losing money is also substantial.
💰Taxes get higher
As the money moves in and out of the stock market, it results in high tax incidents and higher tax liabilities.
Now, let’s discuss the hype of the market; Passive Investments!
💎It’s all transparent!
Active investors work with ‘trading secrets’, but Passive Investing works with clarity and transparency at all times.
📈Low cost is the new high!
Passive investing is about making small investments over a period of time without personally involving oneself in the market chase, which lowers the trade cost significantly.
🤑 Diversification to create a rich portfolio
Investing in a multitude of securities reduces the risk of investing while giving you the chance to diversify your portfolio.
Cons
⏳ Longer gratification period!
The secret sauce to Passive Investing is the power of compounding, so one needs to stay consistent and patient with their investments.
🔑 Lost opportunity
One might miss out on the probable earnings that active investments offer as Passive Investing doesn’t allow frequent transactions of securities.
There is no ideal strategy that fits all, but Passive Investing is definitely good for millennials who wish to start small and earn big in the long run without tracking the market.
But if you are someone who has a knack for investing and wants to feel the thrill, Active Investing can be the best pick for you.
In any case, if you are keen to grow your wealth substantially, creating a strategy that combines both approaches might be your best bet.
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