One of the most important decisions you’ll need to make when you start investing is whether or not you want to be an active investor or a passive one. There are definite pros and cons for each investment style and as you can imagine, both camps feel passionately about their investment choice. So here are a few things for you to consider when you’re deciding between active vs passive investing.
Obviously, the first thing you will need to know is the difference between the two investment styles. Active investment is used by people who invest in the stock market. They will monitor various aspects of the market and buy and sell stocks on a fairly regular basis. The idea is to make more money more quickly and to be able to react to the markets natural volatility.
Passive investing is more about a long term, buy and hold approach and is usually done by investing in IRAs, Mutual Funds, and Bonds. This is the approach many people will use when it comes to saving for retirement or for college. For the most part you can expect to make the same amount of return on your investments as the market makes.
For example, if you want to calculate the amount of money you will earn on a given investment you can just look at the averages of what a certain market has made over the last few years. You will likely get a similar return on your investment.
Many people who believe in active investing styles believe they can get better results than the markets get, which is the biggest reason they will follow this investing philosophy. However, they do incur more risks along the way also.
For the most part, an active investor will be a little more hands on and do-it-yourself and for this reason there is definitely a learning curve. You can’t just jump in and start buying up stocks without having some insight as to the best method of picking stocks to invest in. Remember, you’re not buying a ‘stock’ per se, you’re buying stock in a company. The amount of money you’re likely to make on any given investment is directly tied to how well the company performs. While you will never have any guarantees you can do a little research into the company and it’s management as well as past performance to get a better idea of their potential.
When you go with a more passive approach to investing you will, to a large degree, be handing your money over to someone who will manage your funds for you. They should have the expertise to pick the best possible investments for you. If you choose this method it’s still very important for you to carefully pick the person who will be investing your money. Remember, most of them get paid a commission when they make a trade and they will get paid whether or not they actually make any money for you. You should still be involved if you choose this method.
The most important thing you can do for your financial future is to carefully weigh all the pros and cons when it comes to active vs passive investing. Both have their good points and there bad points and for the most part it depends on you and your long term goals as to which method is best for you.