Passive versus active investing. Which is better?

Hi anon, I think most of the contributors here have already explained the basic gist of the difference between the two, but I would just like to add on a little more about the fundamental differences between active and passive investing.

Active investing is to actively stockpick and look for great value opportunites to generate abnormal returns, or alpha as some would like to call it, above and beyond the market return. It's a constant battle for active investors to look for the best times to enter or exit and investment, further compounded by the difficulty of finding a good stock in the first place! For this method of investments, though there are research done that shows that sich abnormal returns are extremely difficult to consistent keep up, it is still an opportunity for you to beat regular market returns. Hence, unless you are extremely well versed in the financial markets, i highly suggest not to personally engage in active investing, but perhaps invest in a professional, trusted fund.

As for passive investments, it is a "buy and hold strategy" - to enter the market and stay there for the long haul, usually investing in benchmark index tracking funds and etfs that will track and follow the performance of the underlying benchmark. Of course, not all of these index funds are broad based in nature - certain indexes follow extremely niche markets, which you should be extremely cautious of. In the case of a passive index investing, the underlying assumption is that in the overall sense, the market which implies the economy will grow at a steady pace, which means your investments will also grow at somewhat this pace as well! Thats why many people say that when you invest in an S&P 500 index fund you literally grow with America! Thus, the returns you get will be very close to the market returns, whick are modestly respectable.

Hence, both strategies are extremely viable - it all depends on the goal in the end. If you want exponential growth, active will be a better choice. But if you want stable growth that you hardly need to constantly check on, passive is the way to go.

Hi,

It depend on your time commitment. If time is an issue to you, passive investing will be a better choice.

If you want to spend time on active investing then you have to make sure that the return are higher than passive investing. If not, you can just stick to passive investing.

Passive is good for people who do it for long term and are perfectly ok by just following the market instead of beating the market. Active is good if you wan to beat the market but it will take more effort to do so.

It would probably be quite dependent on quite a few factors, but here are some to consider!

1. How much time do you have on your hand?

Active investing definitely takes up more time and energy as you need to monitor your porfolio and general market trends and reactions quite closely. Passive investing allows you to in some sense "sit back" and let your investments earn a positive return, though monitoring is definitely needed.

2. What does your portfolio consist of?

Certain asset classes such as stocks, derivatives and commodities require more of an active investing approach, and market volatility and market changes is what helps investors of such asset classes to earn a return. If you are holding bonds, REITs, ETFs, then a more passive approach may be enough. However, there are exceptions within each of these asset classes, so it woul dbe important to take note.

3. What is going on in the market?

Certain market rouses and volatility may require the passive investor to become an active investor for a good period of time. For example, the current US - China trade war is casuing more people to pay attention to the markets. But a better example would actually be the 2008 financial crisis, where good investments could go bust very quickly, and many who had parked their funds passively suffered.