Active Versus Passive Investing

Active Versus Passive Investing – Introduction:

The debate between active and passive investing has been around for decades. Investors, especially the new ones, are torn between being active or passive money managers. Active managers regularly buy and sell financial assets while passive investors buy assets and hold them for a long time. A good example of an active money manager is James Simons who runs the most successful hedge fund. Simon’s hedge fund, Renaissance Capital, has returned an average of 40% annually. On the other hand, a good example of a passive investor is Jack Bogle, who founded mutual fund company, Vanguard. His aim is to buy low-priced index funds and hold them for a long term.

The truth is that there are merits and demerits of passive and active investing. People have made money using the two strategies for decades.

As a company, Day Trade The World (DTTW) focuses on active trading. However, as I have mentioned regularly, it is also important for traders to diversify their investments in passive investments. This helps them save money for their long-term needs. They can do this by purchasing mutual funds, index funds, or low-priced ETFs. They can also purchase annuities but I don’t recommend these.

The benefit of buying index funds from reputable companies like Blackrock is that it helps you diversify your holdings. By a single purchase, you can have holdings in hundreds of firms at once. The main disadvantage of passive investing is that no one can predict what will happen in the next few years. For instance, no one ever predicted that Brexit or Trump would happen. When that happens, passive managers must hope for the best. Another disadvantage is that the nature of returns in mutual funds and ETFs is not as high as in trading. This is because by having many holdings, the trend will not be the same. For instance, some companies’ stock will move high while others move low. Another disadvantage of passive investing is that a big gain can diminish because of a single piece of news.

Being an active manager means having short-term focus on all holdings that you have. If you are a stocks investor, you will enter and leave positions within a few hours or days. The benefit of this is that it is very easy to spot the trend and follow it. For instance, if a company reports excellent results, it is very easy for you to enter the trade and wait for the direction to change. If a company reports a weak quarter and adjusts its guidance downwards, it is very easy for you to exit the trade or place a short position in it.

The disadvantage of short-term trading is that too much of anything is poisonous. By being always on your trading platform, chances are that you will make mistakes along the way. This happens all the time. Where you open a trade, and win only to open another one again and lose. Good thing about this is that you can control what you make and what you lose. By having a take profit and a stop loss, you will be at a good position to control what you make and what you lose.

The bottom line is that active and passive investing have their own merits and demerits. You can decide to focus on one type of investing or combine the two.

The debate between active and passive investing has been around for decades. Investors, especially the new ones, are torn between being active or passive money managers. Active managers regularly buy and sell financial assets while passive investors buy assets and hold them for a long time. A good example of an active money manager is James Simons who runs the most successful hedge fund. Simon’s hedge fund, Renaissance Capital, has returned an average of 40% annually. On the other hand, a good example of a passive investor is Jack Bogle, who founded mutual fund company, Vanguard. His aim is to buy low-priced index funds and hold them for a long term.

The truth is that there are merits and demerits of passive and active investing. People have made money using the two strategies for decades.

As a company, Day Trade The World (DTTW) focuses on active trading. However, as I have mentioned regularly, it is also important for traders to diversify their investments in passive investments. This helps them save money for their long-term needs. They can do this by purchasing mutual funds, index funds, or low-priced ETFs. They can also purchase annuities but I don’t recommend these.

The benefit of buying index funds from reputable companies like Blackrock is that it helps you diversify your holdings. By a single purchase, you can have holdings in hundreds of firms at once. The main disadvantage of passive investing is that no one can predict what will happen in the next few years. For instance, no one ever predicted that Brexit or Trump would happen. When that happens, passive managers must hope for the best. Another disadvantage is that the nature of returns in mutual funds and ETFs is not as high as in trading. This is because by having many holdings, the trend will not be the same. For instance, some companies’ stock will move high while others move low. Another disadvantage of passive investing is that a big gain can diminish because of a single piece of news.

Being an active manager means having short-term focus on all holdings that you have. If you are a stocks investor, you will enter and leave positions within a few hours or days. The benefit of this is that it is very easy to spot the trend and follow it. For instance, if a company reports excellent results, it is very easy for you to enter the trade and wait for the direction to change. If a company reports a weak quarter and adjusts its guidance downwards, it is very easy for you to exit the trade or place a short position in it.

The disadvantage of short-term trading is that too much of anything is poisonous. By being always on your trading platform, chances are that you will make mistakes along the way. This happens all the time. Where you open a trade, and win only to open another one again and lose. Good thing about this is that you can control what you make and what you lose. By having a take profit and a stop loss, you will be at a good position to control what you make and what you lose.

The bottom line is that active and passive investing have their own merits and demerits. You can decide to focus on one type of investing or combine the two.

Active Versus Passive Investing – Useful Tips: