The key to stock investing could be the strategy we use, not necessarily what stocks we choose. There’s a huge difference between “active” and “passive” investing – and which one you choose could determine how successful your investments are.
“Active” investing is usually done by a portfolio manager who acts as an “active participant.” That means they’re constantly monitoring the market and buying or selling to respond to current events.
Active investing allows a professional to make the big financial decisions that require time, effort and expertise.
But they’ll typically charge an expensive fund management fee, which can eat into the investors’ return. The gains can be higher, but there’s more risk as well.
But there is another option – passive investing.
“Passive” investing is less about buying and selling individual stocks and more about purchasing index funds. Index funds are a portfolio of well-performing stocks that mirror the current financial market – because of this, passive investing usually brings more consistent returns.
Passive investment, while offering consistent returns, isn’t able to react to big changes in the stock market. Once you’ve chosen the passive strategy, you won't be able to quickly change your investment to minimize risk or loss.
There are benefits and drawbacks to each strategy. Picking the best strategy for one’s finances is key for any beginning investor to maximize wealth-building.