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Active vs. Passive Investing: Which to Use and When

Investing is of many different kinds and can be done in various financial instruments! Eventually, the one goal that everyone wishes to achieve is to earn more and have a safety net for the future. At the very beginning it is always vital to get an overview of active and passive investing, which can further explain the need for a diversified investment portfolio for individuals in every walk of life.

Overview of Active and Passive investing

Whenever there’s a serious talk about active or passive investing, the whole scenario turns into a pretty heated fiasco very quickly as the investors and finance managers generally have very strong biased views about one strategy over the other. It can be said that while on one hand passive investing is more famous among the investors, there are also theories to suggest that active investing has a lot of benefits of its own as well. So a diversified investment portfolio is crucial.

•    Active investing

As the name active investing suggests, it takes a hand on or direct approach and needs someone to act as the financial advisors. The aim of active money management in High Frequency Trading is basically to surpass the stock market’s average profits and take total advantage of short term fluctuations of the prices. It involves also a much deeper analysis and justification and the excitement to know when to go into or out of a bond, particular stock or any asset. Financial advisorsusually supervise a group of analysts who analyses quantitative and qualitative factors and then look into their overall statistics to try to understand when, where and how that price will increase or decrease.

Active investing also needs a ton of confidence that whoever is analyzing the portfolio will understand exactly the appropriate time to buy or sell the stocks. Therefore active investment management needs being right much more times than being wrong to make more money.

•    Passive investing

If someone's a passive investor, they would invest for the long haul. Passive investors generally limit the numbers of buying and selling in their portfolios, which makes this a very cost-effective way as far as investing is concerned. The strategy needs a mentality which is buy-and-hold. That indicates to resisting the desire to react or take part in the stock market’s every next move in high frequency trading.

The biggest example of a passive approach is buying an index fund that tends to follow one of the biggest indices like the Dow Jones or S&P. Whenever these two switch up the constituents, the index funds that monitors them automatically turn up their holdings by selling the leaving stock and buying the one which is becoming a part of the index. That is the reason why it becomes such a big thing when a company becomes huge enough to be connected to one of the major indices. It can also guarantee that the stock will be a major holding in many of huge funds.

Passive financial advisors keep their eyes firmly on the prize and tend to avoid the short-term set backs or for that matter, even sharp falls.

Major differences

1.    Benefits and shortcomings of Active Investing

Active investors do not need to follow a specific index, so there is a certain amount of flexibility.

They can also hedge their bets using various methods. That is also a benefit. But these are very expensive and if the analysis is wrong in the case of investing, then it's too big.

2.    Advantages and problems of Passive Investing

Nobody is picking the stocks so due to the cheap oversights, it's pretty low cost. The transparency is great because the assets are always clear. As far as shortcomings are concerned, passive funds are too limited and they have very small returns and to make more money, it takes a while. Because of these a Diversified Investment Portfolio is crucial.

There is a lot of difference between investing actively and going passive with one’s investments, and your financial goals would definitely play a big part in deciding. Either way, investing started at the right time and done in the right direction will definitely help you achieve your dreams sooner and more effectively.