A successful investor needs an agile strategy to consistently and rationally evaluate and adapt to the ever-changing market conditions.
It's like a game plan for managing your portfolio, so you know which goals your trying to achieve, your buying- and selling strategies, limits and risk assessment.
Risk avertion and preference for plessure (want to) before duty (has-to), are incompatible with a healthy financial investment strategy.
ACTIVE INVESTORS
Aims to beat the market’s returns by predicting market fluctuations.
- Involves buying and selling individual stocks.
- In it for the short opportunities (hours, days, weeks).
- Might pay financial specialists to actively help beat the market, hoping for higher profits, and therefore often has double or more expenses and active transaction fees.
- Often use geared broker investment products to increase the volume/profits (options / futures /margin).
PROS
- With the right skills, investment strategy and risk management, investors can outperform a market and indices.
- Can take defensive decisions to reduce losses.
- If risks increases, investors can exit specific sectors or stocks.
CONS
- Less tax efficient.
- Trying to beat the market increases risks and potential profits/losses.
- There is no substantial proof that active investments guaranties more profits (maybe even “on the contrary”)
PASSIVE INVESTORS
Aims to track the market’s performance by giving you returns and dividends.
- Involves buying and holding assets including Index funds, ETF’ and alike.
- In it for the long run (5 - 10+ years).
- Invests in long term, low yearly expenses, high risk/profit assets.
- Won’t pay others to beat the market, and keeps more of the profits, via low yearly costs/expenses.
- Almost never sell any assets.
PROS
- Buy and hold strategy doesn’t invite high annual capital gains tax.
- Lower fees
- Transparency lets you know which assets are in the index fund.
CONS
- Less likely to outperform the index.
- Investors are unable to act if the market goes into decline.
KEY TAKEAWAYS
- Active investing requires a hands-on approach, typically by a portfolio manager or other so-called active participant.
- Passive investing involves less buying and selling and often results in investors buying index funds or other mutual funds.
- Although both styles of investing are beneficial, passive investments have garnered more investment flows than active investments.
- Historically, passive investments have earned more money than active investments.
- Active investing has become more popular than it has in several years, particularly during market upheavals.