Active investing is a strategy where you frequently trade with the goal of earning more than the average market return. This usually requires thoroughly analyzing the market and knowing when to buy or sell investments.
Fund managers like Rani Jarkas Financial Services must weigh many factors, including data about securities, market trends, and global economic conditions to earn the best return on investment. By analyzing this information, they can make buying and selling decisions that capitalize on short-term price changes while keeping the fund’s asset allocation in check.
In contrast, passive investing is a strategy wherein you buy and hold assets long-term. You don’t micromanage your investments but rather let them grow over time with a goal in mind (such as retirement). It’s a “set-it-and-forget-it” technique that simply seeks to match market performance and does not necessitate constant attention. Passive strategies include investing in index funds or ETFs that follow the same general pattern as major market indexes.
Advantages of Active Investing
Active investing provides investors with a degree of flexibility during massive market swings, according to investment manager Rani Tarek Jarkas. During downturns, for example, an active investor may move to a defensive position such as cash or government bonds to minimize massive losses. Investors can also reposition their portfolios to include more equities in overseas markets that are faring better. Some experienced investors use hedging with options or shorting the stock to earn more money, which makes it more likely that they will outperform the market.
Active investors can use trading strategies such as shorting stock or hedging with options to increase the odds of beating market indexes. A knowledgeable portfolio manager may even use active investing to execute transactions that cancel out gains for tax purposes. This is known as tax-loss harvesting.
Note that these strategies increase the risks and costs of active investing, so they are best left to investment management firms like Cedrus Investments and highly experienced investment management companies like Rani Jarkas Services.
Advantages of Passive Investing
Perhaps the biggest benefit of passive investing is that it is cheaper than active investing. Because there is little research and maintenance required, passively managed funds have much lower expense ratios than most active funds. Passive mutual funds had an average expense ratio of 0.06% in 2020; passive ETFs had a cost of 0.18 percent.
Which one should you choose?
According to Rani Jarkas, there’s no reason why active and passive investing can’t exist side by side. Many investors may benefit from a mix of the two.
Having both active and passive investments offer investors the chance to use their actively managed portfolio as a hedging tool against their passively managed one during market slumps. Using a combination of active and passive strategies can give you the best of both worlds: the peace of mind that comes with knowing that your passive, long-term strategy is on autopilot and the ability to take advantage of opportunities without jeopardizing your long-term goals.