You want to invest, smart! But then, what choices do you make? There are so many decisions to make: what will you invest in (stocks, ETFs, crypto?), where will you invest, how much money will you invest with and what investment tactics will you apply? To get you started, it is important to first make the choice: are you going to invest actively or passively? We are big proponents of passive investing, but of course you have to choose a tactic that makes YOU happy. Read along about the pros and cons of both forms.
Active or passive investing: two flavors
How to invest we like to keep simple and divide into two categories:
- Passive investing
- Active Investing
Passive investing
Passive investing, even the experts don’t quite agree on what is passive and what is active. Is passive investing = managed investing? Or can you also pick your own ETF every month, and invest in the same one over and over again, and think of that as passive?
We believe that passive investing primarily means: not trying to find the needle in the haystack, not trading, and choosing an investment product that fits your goals and continuing to invest in it consistently.
Passive & managed
Managed fund investing is thus a way of passive investing. If this suits you, the following parties, among others, are worth investigating:
- Brand New Day
- Semmie
- Meesman
- Peaks
- ABN Amro
Passive & self
Do you want to invest passively, but do it yourself every month, in an ETF, for example? Then consider:
- Degiro
- Easybroker
- Saxo
- BUX Zero
Active Investing
The opposite of passive, is active investing. You trade, buy and sell and enjoy, for example, selecting dividend stocks or being active in the world of crowdfunding.
You will actively engage in this by making informed choices such as:
what do I want to invest in, how much do I want to invest in it and then also doing a bit of research on risk versus return.
Where you can actively engage with your investments yourself?
- Degiro
- Easybroker
- Saxo
- BUX Zero
Whatever you ultimately choose, it must suit you.
How you will invest depends entirely on what you feel comfortable with. It must fit your situation and the type of investing that appeals to you. Remember that there are pros and cons to both active and passive investing.
Passive investing
Advantages passive
- Often lower costs. By making fewer trades, you have fewer costs, a big advantage for passive investing.
- Low maintenance. You put in money and the experts/app do the rest for you. So you basically don’t have to look back at your investment portfolio.
- Less time investment. No complicated figuring out which stocks, bonds or funds to buy. Also, you are not constantly concerned with course progress.
- Risk minimization. By not letting emotions guide you and taking active action, you let your money sit and time do its work. Historically proven to be the best way to achieve long-term returns.
Disadvantages passive
- Engagement. You don’t always have a say in which stocks, bonds are purchased in the case of managed passive investing.
- It can be very boring if investing is your hobby. If you want to build long-term returns without looking back: let it be boring.
Active Investing
Advantages active
- Responding to changes in the market. This is where investing becomes exciting and interesting.
- Ability to respond to investment market volatility.
Disadvantages active
- Costs. Active investing involves transaction costs, and lots of trading often involves higher costs.
- Active investing can tend to “speculate because you are trying to make the right choices, and this is just very difficult as a private investor.
Risk is higher. You’re more likely to indulge your FOMO, and we know by now: don’t go there!
Active or passive investing: which provides greater returns?
When asked which form of investing produces greater returns, we can answer that it has to do with many factors and one is not better than the other. But the caveat we really need to make here is: with active investing, many retail investors do not make the same returns as if they passively track the entire market by investing in broadly diversified funds or ETFs. This is because with active investing you are still trying to make “the right” choice, and you simply don’t know. The future cannot be predicted. So if you have figured out that share X is going to be the be-all and end-all, you may as well be wrong as right.
History shows that when you as a retail investor invest passively, in broadly diversified funds or ETFs, you generally make the most returns. If you are going to actively invest, surely you are trying to figure out what are good choices, and with you many thousands of others. Including seasoned analysts and smart computers.
Find out what an ETF is here!
Perhaps with active investing you can occasionally take a bigger “hit” but remember that there could just as easily be a big loss. Moreover, active investing also generally comes with higher costs.
