What Is Passive Investing?
There are many types of investments that one can research and decide to take part in. Whether it be real estate, stocks, or other financial products, there is no shortage of ways to invest.
But there are two categories of investing that help describe how that investing is managed. These two categories are passive and active investing.
The difference between these two can often be confusing. The pros of cons can also sometimes be a hot topic of debate.
Below we’ll look at what exactly passive investing is and how it differs from active investing
Passive Investing Explained.
Passive investing involves long-term strategies that take advantage of market return averages over time. Passive investing does not try to “beat the market” or time the market.
Instead, passive investing relies on the historical trend that markets rise over time at a steady rate, with the short-term highs and lows canceling out.
Passivized investing can also take advantage of certain tax strategies on tax-advantaged products. In general, a buy-and-hold investing style results in fewer total tax-triggering events.
A perfect example of passive investing would be to buy an index fund for the S&P 500 or Dow Jones Industrial Average. A passive investor would choose an index fund and then simply hold it, not worrying about specific ups or downs in the short term.
Active Investing
We can’t talk about passive investing without touching on active investing.
Active investing involves investing strategies that look to improve upon historic average market returns through managing specific buying and selling.
This can be done by the investor themselves or through a paid portfolio manager or company that handles the trading for the investor’s account.
An example of active investing would be if instead of investing in an S&P500 index fund, the investor instead chose a specific stock that they felt was undervalued and set to increase in price.
The investor would choose a short-term entry price and exit price, and then execute the trade. The goal is to outperform the overall market with more precisely timed trading.
Other Differences Between Passive And Active Trading
Now that we know the main difference between these two types of investing, we can look at some more specifics.
Costs
Active investing will generally have more fees involved, especially if using a portfolio manager or other service. When passive investing, the fees are generally much lower.
Risk
Passive investing is generally seen as less risky than active investing. Due to the long-term holding, ups and downs in the market are balanced and high risk is mostly mitigated.
Active investing can be riskier with individual, shorter trades sometimes going against the investor, leading to losses.
Returns
Theoretically, active investing can bring higher returns than passive investing. This makes it more attractive for those who can allocate a portion of their portfolio to higher risk/higher return investments.
Passive investing has lower returns in general, at least in the short term. Over longer periods, the differences can become smaller.
Help with passive investing
If you are looking for expert advice on choosing the right investments for your portfolio, contact the professionals at ICCNV. Their team of wealth management experts can help you develop the perfect strategy to fit your risk tolerance and goals for the future.
ICC provides clear, unbiased guidance for female executives and it is backed by a team of experienced fiduciary financial advisors. To learn more about the services they offer, visit www.ICCNV.com.
