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Advantages of Active vs Passive Investing

For the past decade passive investing has outperformed with abnormal S&P 500 returns, however we believe active investing will make a comeback over the coming decade.


active vs passive investing

What is Active Investing?


Active investing is a type of investment strategy in which the investor actively buys and sells securities in an attempt to generate higher returns than a passively managed investment. This is typically done through the use of individual stock picking, market timing, or other tactics that aim to outperform the overall market.


Active investors may use a variety of tools and techniques to make their investment decisions, including fundamental analysis, technical analysis, and market news and trends. They may also use short selling and leverage to try to increase their returns.


One of the main advantages of active investing is that it allows the investor to potentially outperform the market and achieve higher returns. However, it also carries a higher level of risk, as the investor is exposed to the potential for losses if their investment decisions do not pan out. Active investing also requires a significant amount of time and effort, as the investor must continuously monitor the market and make decisions about when to buy and sell securities.



What is Passive Investing?


Passive investing is a type of investment strategy in which the investor seeks to match the performance of a specific market index, such as the S&P 500, rather than trying to outperform it through individual stock picking or market timing. Passive investors typically achieve this by investing in index funds, which are mutual funds or exchange-traded funds (ETFs) that track the performance of a particular index.


The main advantage of passive investing is that it is a low-cost and relatively simple approach to investing. Because index funds are designed to track the performance of the underlying index, they require minimal management and do not require the investor to continuously monitor the market and make buy and sell decisions. As a result, passive investing tends to have lower fees than actively managed investments, which can eat into returns.


Passive investing is also less risky than active investing, as it is not dependent on the ability of the investor to accurately predict which stocks will outperform the market. Instead, it relies on the overall performance of the market, which tends to rise over the long term.


While passive investing is a simple and low-cost approach to investing, it also has some limitations. In particular, it may not provide the same level of potential returns as active investing, as it does not allow the investor to take advantage of opportunities to outperform the market.



Benefits of Active Investing


  1. Potential for higher returns: Active investors may be able to outperform the market through the use of individual stock picking, market timing, or other tactics. This could potentially lead to higher returns than a passively managed investment.

  2. Flexibility: Active investors have more control over their investments and can make decisions about which stocks to buy and sell, as well as when to do so. This allows them to take advantage of specific opportunities or market conditions.

  3. Customization: Active investors can tailor their portfolio to meet their specific investment goals and risk tolerance.


Who are the Major Active Investment Managers?


There are many large investment managers that engage in active investing. Some of the largest active investment managers include:


  1. BlackRock: BlackRock is a global investment manager with over $9 trillion in assets under management. It offers a range of actively managed investment products, including mutual funds, exchange-traded funds (ETFs), and separate accounts.

  2. Vanguard: Vanguard is a leading provider of mutual funds and ETFs, with over $6 trillion in assets under management. While it is best known for its index funds, which follow a passive investing strategy, it also offers a range of actively managed funds.

  3. Fidelity Investments: Fidelity is a financial services company with over $3 trillion in assets under management. It offers a wide range of actively managed investment products, including mutual funds, ETFs, and separate accounts.

  4. T. Rowe Price: T. Rowe Price is a global asset manager with over $1.5 trillion in assets under management. It offers a range of actively managed investment products, including mutual funds, ETFs, and separate accounts.

  5. Invesco: Invesco is a global investment manager with over $1 trillion in assets under management. It offers a variety of actively managed investment products, including mutual funds, ETFs, and separate accounts.


These are just a few examples of the many large active investment managers that operate globally. It's important to note that the size of an investment manager does not necessarily reflect the quality or performance of its investment products.



What are some Active Investment Strategies?

Here are a few examples of active investing strategies:

  1. Individual stock picking: This strategy involves selecting specific stocks to buy or sell based on the investor's assessment of the company's fundamental characteristics and growth potential.

  2. Market timing: This strategy involves attempting to predict changes in the direction of the market and buying or selling securities accordingly.

  3. Sectoral rotation: This strategy involves rotating investments between different sectors of the market based on the investor's assessment of which sectors are likely to perform well in the short-term.

  4. Long-short investing: This strategy involves taking both long and short positions in securities, with the goal of generating returns from both rising and falling prices.

  5. Tactical asset allocation: This strategy involves actively adjusting the mix of assets in a portfolio based on the investor's assessment of market conditions and expected returns.

  6. Value investing: This strategy involves identifying undervalued securities and buying them in the expectation that their prices will rise over the long-term.

These are just a few examples of the many active investing strategies that investors can use.



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