An important part of investing for long-term financial goals is determining how to invest your money.
Some investors prefer to take a hands on approach that seeks to beat the market. Other investors prefer a more straightforward approach that seeks to track the performance of the market over time. This is called active and passive investing. Understanding how each works can help you determine which approach best fits your financial objectives, risk capacity and investment horizon.
Active vs. Passive Investment: What’s the Difference?
Active investing means picking and managing investments in the hope of outperforming a particular market benchmark. Portfolio managers research companies, analyze economic conditions and determine when to buy, sell or modify holdings. This approach allows for flexibility, but results depend on investment decisions, and management fees may be higher.
Passive investing is different. Passive strategies are usually designed to track the performance of a given index, such as the S&P 500, rather than trying to beat the market.
Neither approach guarantees positive returns. Both can experience losses when markets decline, and each has advantages worth considering.
Active Investing Pros and Cons
One potential benefit of active investing is the ability to alter a portfolio as market conditions change. A manager may reduce exposure to certain investments, identify opportunities in undervalued companies, or modify allocations based on an investor’s objectives.
But active management needs research, constant oversight and good judgment. Frequent trading adds costs and beating a relevant benchmark after fees is hard to do consistently. A manager’s experience does not guarantee better performance.
Active investing may be a suitable option for investors who desire professional management, a personalized portfolio, or the flexibility to adapt to changing financial circumstances. Understanding the associated costs and risks is essential before choosing this approach.
The Reasons Passive Investing Appeals to Long-Term Investors
Passive investing may appeal to investors because it generally involves less active trading and may have lower management expenses than actively managed strategies.
Another possible benefit is diversification. By investing in a fund that tracks a broad market index may provide exposure to a range of companies and securities. However, diversification does not eliminate market risk, and the level of diversification depends on the fund’s underlying holdings.
Even passive investing is a test of patience. Since the strategy is based on a market index, investors should expect market fluctuations, not hope to avoid market declines.
How to Choose an Investment Strategy
Your financial situation, your goals and investment horizon are important considerations when evaluating which approach may be appropriate for you.
Consider your investment timeline, expected income needs, existing assets, and the costs associated with each option.
It is also important to note that active and passive investing are not mutually exclusive. Some portfolios are a mix of the two, offering broad market exposure and some targeted investment decisions.
FARO Wealth begins the investment management process by getting to know you – your goals, your expectations and your risk tolerance. A thoughtful strategy should reflect your individual circumstances rather than follow a one size fits all approach.
Develop an investment strategy that reflects your goals
You don’t have to pick an investment strategy because it’s “in” or because it works for someone else. The most appropriate approach is one that supports your long-term financial objectives while helping you understand the risks involved.
If you are trying to decide between active and passive investing, FARO Wealth can help you sort through the options and develop a strategy that reflects your financial goals, risk tolerance, and circumstances. Visit FARO Wealth to request an appointment and take the next step toward making informed financial decisions.
Disclosure:
The S&P 500 is a market-cap weighted index composed of the common stocks of 500 largest, publicly traded companies in leading industries of the U.S. economy All investing involves risk, including the possible loss of principal. There can be no guarantee that any investment strategy will be successful or achieve its intended objectives. Diversification and asset allocation do not assure a profit or protect against loss in declining markets. This is for informational purposes only, is not a solicitation, and should not be considered investment, legal, or tax advice. Please consult your investment, legal, or tax professionals for specific information regarding your individual situation. Rafael Gutierrez is registered with, and securities are offered through Kovack Securities, Inc., Member FINRA/SIPC. 6451 N. Federal Highway, Suite 1201, Fort Lauderdale, FL 33308 Ph: (954) 782-4771. Investment Advisory services are offered through Kovack Advisors, Inc. Faro Wealth is not affiliated with Kovack Securities, Inc. or Kovack Advisors, Inc.
