Your guide to active and passive investing strategies
submitted by Tim Goodwin
Time in the market versus timing the market. Play the long game. Buy and hold. Adages like these get tossed around all the time by passive investors. And if you’re like most people, you nod your head when you hear them but are somewhat unsure what they really mean. Isn’t it usually better to be active? Why would investing in the stock market be any different? If you’re wanting a crash course on active versus passive investing and want to know which one is better, this is the article for you.
What’s the Difference?
If you’re an active investor, you’re trying to consistently outperform the market. If you’re a passive investor, you’re not. It’s that simple.
Why Passive is Better
While you may have correctly predicted the market before, that’s no guarantee of future success. In fact, over the long-term, active investors consistently underperform their passive counterparts.
In addition to the lower returns, active investors also pay more in fees. If you choose an actively-managed fund, you’ll usually have a higher expense ratio than you would with a passive index fund. And if you invest in individual stocks, you’ll have to deal with transaction costs and other sales-related expenses. Either way you go, trying to beat the market will take more money out of your pocket and put it into someone else’s.
So Why Invest with an Advisor?
If passive investing is better, then do you really need the help of a financial advisor? It’s a fair question, and for someone just starting off, you may not. However, for the well-established investor with more to lose, having a financial expert in your corner can be a tremendous advantage. These third-party advisors will help you identify the best passive funds, remind you that it pays to stay in the market – even when it’s trending down – and work with you to chart a path toward your bigger, better financial future.
So, while trying to “beat the market” and managing your own investments may seem like a thrill, do you really want to gamble with your future?