The Motley Fool

Should You Be An Active Investor Or Passive Investor?

Active investing and passive investing. Which should you pick? This article aims to give an overview of what this two is about, and I hope it can help investors make a better choice between the pair.

Active investing

As its name suggests, active investing is an approach that requires more active decisions to be made about the kinds of investments that go into our portfolios. The investments can be either individual stocks, a collection of unit trusts, or a combination of both. Active investors can also usually be grouped into three different camps, such as income investing, growth investing, and value investing.

Active investing requires a constant monitoring of the market, and research to select stocks. This also means that investors would need to spend a substantial amount of time to keep up with market developments. It may sound like more effort, but if the research pays off, there is the chance of earning outsized returns.

Passive investing

On the other hand, passive investing is a more hands-off approach that involves investing in index funds or ETFs (exchange-traded funds). Both products are designed to imitate the performance of a certain stock market benchmark. By investing in this manner, there’s no requirement to think about the kinds of stocks that go into our portfolios – we’re buying the whole market.

Investors may want to choose a passive approach due to a few reasons. For example, they may have no time to analyze stocks due to work or family commitments. Or perhaps, they have no interest in learning the necessary steps to invest with an active approach. Passive investing results in investors earning market-like returns – there’s no way to outperform the market, but there’s also low risk of earning sub-par returns.

Keeping these differences in mind, investors should decide which approach is suitable for them: The active or the passive way.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.