Active or passive investing?
You can invest in many products (stocks, ETFs, bonds, crypto, real estate, etc.) and in a variety of ways. We divide how you can invest into two categories: active investing or passive investing. But what’s the difference, and which one is ‘the best’?
Active or passive investing
There is no hard truth when it comes to what exactly is active or passive investing. Some say that passive investing is when someone else does it for you, and others argue that passive investing is mainly about the type of investment product you choose.
Let’s say that passive means that you invest in accordance with your plan every time, without wanting to anticipate trends and events. With active investing, you try to make the right investment moves at the right moment.
Dictionaries explain the word passive as: without doing anything, inactive. Because passive investing means that you make money available to invest, and that you invest steadily according to your plan or let someone else actually invests this money for you.
Who invests your money for you? The easiest way to do this is to go to a neo bank that will automatically invest your money into funds. But you can also invest passively yourself by choosing a certain product and keep on investing in this product regardless of what is happening in the market.
The opposite of only transferring money into your investment account and invest it according to your plan, is that you take the ‘investment’ part and do it yourself. Therefore, you yourself decide which products you like to invest your money in and you anticipate on the market trends. For example stocks, crypto trends or real estate. You will actively work on this by making well-considered choices: such as: what do I want to invest in, how much do I want to invest in , plus doing some research about risk versus return.
Where can you actively get started with your investments? When it comes to active investing, there are many brokers who can do this for you. For example, BUX Zero, Degiro, Trade Republic, eToro and more.
Whatever you ultimately choose, it should suit you.
How you invest depends entirely on what you feel comfortable with. It should suit your needs and the type of investing that appeals to you. Keep in mind that there are pros and cons to both active and passive investing.
- Often lower costs. By making fewer trades you incur less costs, a big advantage for passive investing.
- Low maintenance. You put in money and let it work. So in principle you do not have to look at your investment portfolio.
- Less time investment. No complicated figuring out which shares, bonds or funds you want to buy. You are also not constantly busy with the course of the exchange.
- Risk minimization: by not being guided by emotions and actively trading, you let your money sit and let time do its job. Historically proven, this is the best way to achieve long-term returns.
- It can be very boring if investing is your hobby. If you want to build a long-term return without worry: let it be boring.
- Responding to changes in the market. This makes investing exciting and interesting.
- Ability to react to the volatility of the investment market.
- Cost. Active investing involves transaction costs.
- Active investing can tend to ‘speculate’ . You try to make the right choices, this is can be very difficult as a private investor.
- Risk is higher. You’re more likely to assert your FOMO, and we know by now: don’t go there!
Active or passive investing: which ensures a higher return?
When asked which form of investing yields a higher return, we are not able to answer that. This has to do with many factors and that one is not better than the other. But the caveat that we really have to make here is: with active investing, many retail investors do not make the same return as when they passively follow the entire market by investing in broadly diversified funds or ETFs. This is because with active investing you try to make the ‘right’ choice, and you simply do not know upfront what is right. The future cannot be predicted. So if you’ve figured out that stock X is going to be IT, you can just as well be wrong as you are right.
History shows that when you invest passively as a private investor, in broadly diversified funds or ETFs, you generally make the most return. If you are going to invest actively, you still try to figure out what good choices are, and with that many thousands of others with you. Including seasoned analysts and smart computers.