Active V.S. Passive Investing
It’s so common nowadays to hear about that YouTube guru retiring with the profits they made from doing investing or how our neighbours and friends made money from trading. After hearing these success stories, we say to ourselves, "How I wish I could be like them too..." How great it would be
if that was me!” Buoyed with these thoughts, we make the first step of opening a trading account.
Are You a Trader Yourself?
With referrals and promotions left and right, along with the digitalization of banking and the financial industry, it has never been easier to open a trading account and transact online. Trading itself is not the issue, but the problem comes when we do not have the time to do our research and analyse the instrument that we are buying into.
But do you know that there are different approaches to invest?
Lets bring in the debate of active versus passive investing!
What is “Active Investing”?
Active investing means investing based on constant analysis, with the objective to “beat the market” and predict the next upward trend. It involves the need to react quickly to stock price changes to buy and sell them in order to earn the profits.
What is “Passive Investing” then?
Being a passive investor would bypass the need to assess new funds constantly to spot the next upward trend. Your investments are done consistently over a period of time no matter the market fluctuation. This way, emotions are less likely to come into play and the price you bought the funds at would ultimately enjoy dollar cost averaging for you to reap the overall returns.
Sounds good? What about two in one?
The Best of Both Worlds?
There is a way of investing into an actively managed portfolio while taking a more passive role at the same time. For real?! This can be done by investing in funds that are actively managed by professional fund managers consistently on a monthly or yearly basis, eliminating the need to actively manage our portfolios.
Since these funds are managed actively by professionals, these portfolios are managed by anticipating market movements and reacting based on well-researched market dynamics.
How can you tap into this?
You can do so by investing into unit trusts or investment linked policies offered by insurance companies. Depending on the funds and portfolio, these fund managers are picking individual stocks with potential for outsized gains, while some adjust asset allocation by investing in sectors or industries that they believe will do well. Some employ a mix of both.
These portfolios are managed professionally by analysing and keeping up to date with market movements and trends which not all of us might have the time and expertise to do so.
If there is a downward movement, the professionals know how to react and manage the funds, while inexperienced traders just trigger the panic button and sell to cut perceived losses.
Some Questions Worth Asking
Before jumping onto the bandwagon and decide whether to invest actively or passively, there are some questions worth asking.
1- What is your time horizon?
How long are we planning to stay invested ? When are we planning to draw out our capital and investment?- Time horizon will greatly affect the approach that one might consider. For instance, a passive approach might be for someone who is looking at a longer time horizon compared to someone who is actively investing.
"Time in the market beats timing the market"
Some of you may have heard about the statement of “Time in the market beats timing the market”
And surely, what the fund managers do with active portfolios are buying and selling in with opportunities and analysis that they see. And the passive approach might also be an option for those that prefer time in the market strategy. By investing in an index fund or ETFs, we can let the market average do its job, going on auto pilot and grow organically by itself instead.
2- How much time are you willing to commit to understanding the markets, the companies you’re investing in?
This is a very important consideration--How much time we are willing to research the financial instrument or stocks that we are buying in or holding onto.
For students like myself, I may have the time to keep up to date with the news and the financial markets. However, once we transit to a professional career or start a family, we might not have the time to engage actively in our investment.
3- How much profit is enough?
Then there comes the question of "How much is enough?" How much returns are we looking for ? Because short term, active trading may be an option for those that might be looking for higher returns, compared to passive a strategy that takes advantage of the longer term horizon as well as dollar cost averaging method. So the returns that one investor look out for will also be taken into consideration which strategy to take.
4-Do we know the risks and do we have the expertise to assess them?
What are the risks involved and how much risk are we willing to take? With little expertise and time committed into the stock markets, we need to re-consider whether we are experienced enough to react to the market as quickly as the experts do. Furthermore, we need to consider the market hours if we are trading in the non-local markets. The difference in time zone may not be ideal for us to react to market conditions.
Hmm What If...
So some of you might see something here. Like myself, we see the advantage of passive investing being something that takes less effort as compared to an active approach. Whereas an active approach might bring higher returns. This balance could be fulfilled by investing in actively managed funds.
Definitely, investing in such managed portfolios may cost slightly more due to the fees that they will charge in exchange for their time and expertise. So, it comes back down to time. Do we have the time to do what these portfolio managers are doing? Rather than spending time on reading financial statements and research articles to grow our hard-earned money, perhaps our time could be better spent building our chosen careers, enjoying our hobbies or spending quality time with our family.
Your choice to go for active or passive investing, or tap into actively managed investment linked policies is totally up to your preference and inclination.
If you want to see yourself in YouTube as a financial guru to be or that neighbour who makes money trading, it is well worth asking those few questions before making that step!
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