Changing From An Active Investor To A Passive One

Investing in assets can be carried out in one of two ways: active investing or passive investing. The former is when the goal is to take advantage of short-term market fluctuations, making gains on the swing of the stock market. To come out in profit means you need to ‘beat’ the average market returns more often than you lose.

Passive investing, on the other hand, doesn’t rely on what are often volatile market movements. It’s more about being in it for the long haul, with less buying and selling (and therefore requiring less time and effort) within a portfolio.

The following discusses everything you need to know about your investment tactics from an active to a more passive approach.

Active vs. Passive Investing

• Pros and cons of active investing
• Pros and cons of passive investing
• Advantages of changing to a passive investing model

Pros and cons of active investing

The advantages of active investing include true flexibility, the ability to hedge your bets on put options or short sales, as well as exiting specific stocks when you consider the risk to become too great. There’s also the ability to tailor tax management strategies, such as selling loss-making funds to offset those that bring in big profits. There’s also the potential to make dramatic gains, especially when the market is volatile.

Disadvantages include:

• Time-intensive: Either by the individual who’s making the buying or selling decisions or the need to utilize the talents of a trusted portfolio manager who does it for you
• It’s expensive: Compared to a passive investment strategy you can expect to pay around 1.4% for actively managed funds, as opposed to only 0.6% for a similar passive managed fund
• Higher risk: Reliance on higher risk investment can bring higher returns. It can also bring greater losses when you get it wrong.

Pros and cons of passive investing

Passive investing is all about the long-term. There’s limited buying and selling within a portfolio—it’s much more of a buy-and-hold strategy. 

Passive investing has many advantages: 

• Very tax-efficient: Holding onto assets usually doesn’t bring massive annual tax responsibilities.
• Very low fees: Far lower than that of active investing as nobody is carrying out the work needed to constantly pick stocks.
• Full transparency: With such funds, it’s always clear what assets make up the portfolio.

On the flip side, the disadvantages are: 

• Limited asset availability: You’re limited to specific investments with no wiggle room. Whatever the market is doing, you’re locked into these pre-determined holdings.
• Less dramatic returns: Because passive investing is designed to track the market, they’ll never be the chance of the huge windfalls that can be up for grabs in times of turmoil—unless, of course, the market booms.

Despite this, there are many advantages of switching to a passive investing model. 

Advantage of changing to a passive investing model

Passive investing is often seen as the middle ground when it comes to management strategies. Likely gains are far higher than leaving your money in a paltry-paying savings account, although it may not benefit from the chances of massive profits that the higher-risk active choices might bring.

Overall, historical records show that passive investing works best for most investors. Active investors might make short-term (and sometimes spectacular) gains, but decades-worth of studies show often disappointing results for the active approach.

For the average investor, switching from active to passive investing has many advantages: lower fees, equally good returns, less effort, and none of the heart-stopping moments that the high-risk active strategies commonly bring.

How Capita Can Help You Structure Your Path To Financial Success 

Building a solid capital investment over time takes expertise and a balanced approach. At Capita, we’re dedicated to helping you create the investing framework that’s right for your needs. Your dedicated financial advisor will help identify your goals and determine your unique needs based on aspects, such as lifestyle, personal values, attitude to risk, and current cash flow. 

Once this is done our experts construct a bespoke investment framework for you—one that’s specific to your goals, your current needs, and building towards your future.

Discover more at https://www.capitafinancialnetwork.com/services/investing and start your new investment strategy today.