Which type on investment strategy, passive or active carry higher risk? - Seedly
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Anonymous

Asked on 25 Mar 2019

Which type on investment strategy, passive or active carry higher risk?

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Lim Boon Tat
Lim Boon Tat, Mathematics at Cambridge University
Level 6. Master
Updated on 07 Jun 2019

I feel that the nomenclature used here (passive vs active) are overused and misused. The real question and decision you are trying to make is:

(A) Buy ETFs

(B) Rely on other humans to manage your money (mutual funds, investment linked policies, REITS etc)

(C) Do-it-yourself

Option A gives you “market” returns, which average around 7-10% annually. Option B requires some amount of thought and selection. Most funds do not outperform the market. Most financial advisors’ incentives are not completely aligned with yours.

Option C is what i encourage most people to do (eventually). Sure it takes time and tons of self-education. Maybe you can’t do it in your first ten years of your working life (you don’t have much capital anyway). Take 10 years to learn.

I always feel that Personal Finance comprise two different components. The Finance part is easy, with plenty of literature on the topic. The Personal part, because it’s personal, is very difficult, and the option you choose, ultimately depends on your lifestyle, lifestyle needs, preferences etc.

If you have a long term goal (e.g. retire at age 65 with $5M in the bank), but you don’t think you will ever earn more than 100k a year, then Option C is likely the only way you can achieve your goal. Better start cracking.

If you have a long term goal (e.g. retire at age 65 with $5M in the bank), but you are on track to earn 500k a year, then Option A is easiest. (Actually, any option will probably get you there, if you are not buying ferraris on a regular basis).

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Boon Tee Eng
Boon Tee Eng

27 Mar 2019

👍🏻👍🏻
Zann Chua
Zann Chua
Level 6. Master
Answered on 25 Mar 2019

Hello!

I personally feel that active investing carries a higher risk if you are a beginner and do not have much background and knowledge about investments. This is because active investing requires the monitoring of stocks as you are actively buying and selling in the stock market. If you do not have much knowledge about investing, it is more likely that you will end up buying and selling stocks at the wrong time which could result in you losing large amounts of money.

However, if you were to use passive investing where you invest a fixed sum every month, it is likely that you will be able to cushion against any large increase or decrease in prices since Dollar cost averaging is being carried out.

But of course both passive and active investments carries risks , i personally think doing a mixture of both would be the best option.

Hope this helps!

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Sandra Teo
Sandra Teo
Level 7. Grand Master
Updated on 07 Jun 2019

Hi there! As Zann mentioned, active investing strategy typically involves higher risks. Active investing is when the investor tries to beat the market and if succeed, it translate to higher than average returns. On the other hand, passive investing is adopting the buy and hold tactic. A passive investor is thus limited to an index fund (only tracks index and as such will not outperform the market). When the market is volatile, active investing outperforms more often than when it is not. However passive investing is appropriate as specific securities are highly correlated. When used in tandem, you can leverage the most valuable attributes of each market.

One thing to note when using a mix of both strategies, is that achieving successful active investing has historically proven more difficult within select asset classes and portions of the market (eg. large companies). So depending on your situation, it may make more sense to veer a bit more passive in those areas and rely more on active investing in asset classes and parts of the market where it has historically proven more profitable to do so (Eg. international stocks and smaller companies)

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Boon Tee Eng
Boon Tee Eng

27 Mar 2019

When the market is volatile, active investing outperforms more often than when it is not. At the same time it also underperform more often.
Frankie Rappaport
Frankie Rappaport
Top Contributor

Top Contributor (Jul)

Level 9. God of Wisdom
Updated on 16 Feb 2020

https://assetbuilder.com/knowledge-center/articles/why-it-keeps-looking-worse-for-actively-managed-funds

... how would You find out that your active manger is the good one in the first place ? ...​​​

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Kishor Bhagwat
Kishor Bhagwat
Level 5. Genius
Answered on 26 Mar 2019

Could you please

1.define what risk means to you? Is it risk of permanent loss, risk of not meeting your target return? Risk in terms of volatility?

  1. What is your definition of active and passive 'strategy'? They mean different things in various contexts.

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