Active Investing vs Passive Investing
Disparity of opinion lives in the minds of active and passive investors. Both follow different strategies and goals. Active investment involves strategies of selecting securities in a bid to outperform a benchmark index. Passive investment involves strategies to match the returns of a benchmark index.
Meir Barak, founder of Tradenet, the largest day trading education company in the world shares his insights: “In general, what I believe in more than anything is day trading. On the intraday graph I know, and can teach my thousands of students every day on my live trading chat room, that there are certain behaviors that the market and specific stocks tend to present. We make a lot of money this way. But, if you try to invest long term, who knows? As I mentioned on my book, The Market Whisperer, there could be fatal events of so many sorts over a lengthy period of time. That’s why I like ending my day with all (or at least most) of my money in my hands.
Let us try to understand the two further. The differences between active investing vs passive investing and which one is the right one for you.
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What is active investing what is passive?
Active Investing is an investment strategy to supports investor’s activity of buying and selling. The active investors buy securities and derivatives and track their activity to make use of the opportunities that arise along the investment period.
Active investing is a complex process. Active investors keep monitoring the prices of their stocks multiple times a day. Active investors are looking for short term profits to support longer term goals.
is an investment strategy that focuses on gaining long term profits, and ignores the short term altogether. It does not require day-to-day management of the portfolio. A passive investor limits the on-going buying and selling activities. Passive investors build a portfolio, buys securities and holds the portfolio for a long term. They do not buy and sell when the prices change due to market fluctuations, and are indifferent to daily news and the like.
Where should one expect higher rates?
In general, during bear markets, active investors tend to obtain worse results than passive investors do. During recovery, however, the active funds recover faster. It implies a higher beta to active investors in comparison to passive ones.
That’s the observation from 2009 as well. When stocks started bouncing back, Fidelity Growth Company (FDGRX) jumped 41%, and the S&P 500 a smaller, while still impressive, 26%.
The best places one should expect passive income are ETFs and mutual funds. Those, in general, correlate on average with the market.
On what does the investor base his decision in both cases?
Academic studies compare returns on actively managed mutual funds and passively managed mutual funds. These studies reveal results over a longer duration. Actively managed funds don’t deliver more than the passive counterparts, because trading costs fees. Active funds suffer higher costs, and the fund manager should collect additional returns to cover the costs. This should take place before the investor starts to see the performance more than the comparable index funds.
Passive investment is more tax efficient. Since passive funds are not much into trading, it implies that they have lower fees and less capital gain distributions, that is often triggered when profit is materialized. Profits must often pass through to an individual’s tax return. Investing in non-retirement accounts implies that a passive investment approach in use constantly should minimize the ongoing tax bill.
When an active and passive approach is combined, it is preferably to put actively managed funds in tax-sheltered accounts such as IRAs. Then place passive funds in non-retirement accounts.
What Are the Alternative to Investing – Day Trading
One of the best alternatives to investing is day trading. Day trading is an investment strategy to buy and sell the securities. It helps in focusing on gaining profit from the price movements on a very short term stock chart.
Day trading includes active management in a short term holding period. On the other hand, investing includes passive control with a long term holding time horizon. It spans over from several months to years. Day traders are more focused on short term trades in a single trading day using access to trading platforms.
Meir Barak summarizes: “The money I save – I invest outside of the exchanges. I don’t know where the markets are going over the long run. Its not my profession and most people who that is their profession often get fired. I know how to day trade the markets and go green on nearly 70% of trading days and even more than that on individual traders. In that I trust and that I can teach and not in nothing else.”