Active vs Passive Investing

CONTRIBUTIONS BY: VICTOR GIORDANO & JW RAYHONS

When talking about passive and active investing, we constantly hear a debate of why one could be better than the other. However, they are two different strategies that could be used in different situations, benefiting investors differently.

Active Investing

As you may expect, takes an active approach managing the portfolio. The portfolio manager tries to take advantage of short-term fluctuations and opportunities in order to achieve above average returns. Usually behind the portfolio manager sits a team of analysts looking at different types of data in order to determine the changes in the portfolio.

Benefits of Active Investing

Involve the flexibility of not having to mirror an index and being able to find more growth opportunities (according to their analysis), as well as the ability of using hedge strategies to try to minimize risk. Some of the disadvantages you may encounter with active investing include their fee structure being more expensive as well as having a higher risk, as portfolio managers look for higher returns.

Passive Investing

Has the buy and hold mentality. This strategy limits the changes in the portfolio and tend to not anticipate or react to short-term stock market changes. An example would be investing in a fund that mirrors an index, such as the S&P 500. Changes to the index funds happen when the indices change their constituents. In other words, the index fund that reflects the S&P 500 changes its holdings when the constituents of the S&P 500 change.

Benefits of Passive Investing

Include lower fees, since there is not a need for an active portfolio manager, as well as being prone to be tax-efficient due to the strategy tendency to hold investments for longer periods of time. Some of the disadvantages of passive investing involve the limitation to the indices holdings which may result in smaller returns given the lower risk taken.

Which is Best..

Active and passive investment strategies are beneficial in different situations, if you have questions regarding what type of investment would be the best option for your situation give us a call at 480-507-2425 and schedule an appointment to discuss about your specific situation.

The content in this article was prepared by the article’s author. Cetera Advisor Networks, LLC does not endorse its content, and the views expressed may not necessarily reflect those held by Cetera Advisor Networks, LLC.