Active vs Passive Investing - Which one wins?
February 5, 2021
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You may be wondering which approach is right for you. Whether you want to be an active or a passive investor, it all depends on your comfort level and goals. An active investing strategy involves actively being engaged in managing an investment. Passive investing is more of a hands-off strategy. They both have their advantages and disadvantages and boil down to your own preference and how you would like to engage in your investments.
What active investing looks like in stocks & bonds
For public market stocks & bonds, this could mean monitoring the prices of your positions to minimize losses and buying investments when they're on the rise to eventually sell at a premium. You must be actively spending significant time researching market trends, economic conditions, and staying up to date on the latest news.
An active investor seeks to outperform a specific benchmark. For example, if you enjoy picking stocks & timing the market, and having invested $10,000 with founder Elon Musk in 2010, your stake would be worth $1.8 million now. This of course carried its own risk and volatility along the way.
Some industries have a better chance than others at rebounding from volatility caused by coronavirus. Although nobody can predict the future, it might be a good idea to expand your portfolio or across different industries. Investing in Exxon, which was once considered a blue chip stock, could have lost you money in today’s market. Oil and gas companies were already struggling before the pandemic and many are currently at an all time low. As of December 2020, Exxon Mobil stock is down -42% YTD.
Passively investing in stocks & bonds
Passive investing in the public markets (mutual funds or ETFs) doesn’t aim to beat the benchmark but instead mimics the benchmark or some method of indexing. Passive investors aren’t constantly trading to earn a high return during market fluctuations. Some investors prefer a more passive approach since it’s typically hands off and automated experience. A well-known passive investment opportunity is buying and holding an index fund in the S&P 500. You’ll ride the market with it and hold on when the market is down since you’re in it for the long haul.
Active investing with real estate
There are plenty of ways to get involved in real estate, but it starts with determining if you’d like to be an active investor, passive, or a blend of the two. Being an active investor in real estate is like sitting in the driver's seat. It involves significant engagement in the investment process. As an active investor you’re doing the due diligence on the deal, managing the property, handling tenants, and even selling the property. But like all investments, there are risks associated. Ensuring the success of a property requires responsibility and experience. If you’re an active investor you are usually assuming a substantial amount of risk for a double digit return on your investment.
Passive real estate investing
So what do you do if you don’t have the desire, time, or experience in real estate to be an active owner in real estate? There are other options out there that can help you get your feet wet in real estate. As a passive investor you’re okay with taking the backseat since you might have a team of successful people that help you achieve your real estate goals. You might invest with an investment company, brokers, or have a team that manages your entire portfolio for you. One disadvantage as a passive investor is you have no control over the assets and performance of properties. You must have complete faith in your management team and money is not always available to you at your discretion.
The advantage of being a passive investor is you’re able to reap the benefits of the potential profits and you are removed from actively managing the deal yourself. As a passive investor, your goal is to do the least amount of work and have the peace of mind knowing you’re earning consistent returns. Importantly, passive investing requires less of your time, since you’re engaging a third party to manage the investment on your behalf.
No matter which strategy you choose to go with, you'll still want to monitor your portfolio’s performance, continue funding these investments, and keep up with the latest trends. If you’re looking to get involved in real estate on an active or passive level, make sure you understand what it takes to do both.
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