Which of active or passive investment is the better option?

Which of active or passive investment is the better option?

With the fast development and growth of the securities market, there are a lot of irrational investment behaviors leading to the market’s inefficiency. Hence investors must be aware of mature investment ideas and investment strategies. Being divided into active and passive investment strategies, which one is the best option for you?

Active investment

The active investment seeks the maximum return on investment within a certain investment limit, through detailed portfolio management. To take advantage of the short-term price changing, investors must know about every stock, bond or asset and when to pivot into or out of it.

Passive investment

Passive investment strategies are usually based on long-term returns. With the deep research and analysis of the stocks, investors will focus more on the growth and potential long-term returns.

The differences between Active and Passive investment.

  • Investment objectives. The active investment is to defeat the market, while the passive investment is to reap market (average) returns maximally.
  • Historical average return. Among individual investors, average returns of active investments are lower than passive investments.
  • Strategic decisions. Active investors need to make many decisions, such as selecting stocks, timing, fund manager, etc.. While passive investors do not consider those elements overly.
  • Trading volume: Averagely speaking, the annual trading volume of active investors is about 6 times that of passive investors. Considering the transaction costs (commissions to brokers), the active investors need to pay much higher than static investors.

What investment strategy is suitable for you?

The two kinds of investment strategies have both its own advantages and disadvantages. The passive investment strategy depends more on the investors themselves; while the active investment strategy depends on the investor and the fund managers. They are both responsible for the investment strategies even if it’s successful or failed.

If you are familiar with the market and be capable of investment ideas, you can choose passive investment strategies; if you don’t have the professional ability in the market, but you have a good vision of people, so an active investment strategy is suitable for you. Just find a reliable fund manager, and pay him some fees.

From the data point of view, in the bull market, most active investment funds usually show worse performance than passive investment index funds; while in the bear market and shock market phases, most active investment funds can outperform passive investment index funds.

For individuals, it is best to combine active and passive investments, using professional judgment and fund allocation at the same time. When the valuation is low, choose a flexible index fund or enhanced fund;  when the future odds are high, choose an index fund with strong profitability; when the valuation is moderate, switch to a bond fund at a valuation high.

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Michael Aniston

Michael started with a master's degree in finance before he went into technology and coding. He is now a freelance journalist and video producer living in Berlin, Germany. When he doesn't write, he will travel many countries.