Active Investing vs Passive Indexing
Historical Investment Philosophy
For years, investors have debated the merit of active and passive investing. Usually, the divide comes between holistic wealth advisors and analytical portfolio managers. Wealth advisors tend to believe passive investing produces the best results for the time invested. On the other hand, experienced portfolio managers believe technical analysis and market fundamentals can be used to time the market.
Essentially, active investors are attempting to beat market averages through the exploitation of short-term price fluctuations. This tactic requires a great deal of time due to the amount of hands-on work that’s required to be successful. This school of thought is usually attended by portfolio managers and analysts who spend a great deal of time developing their technical skills. Although in the long-term active managers realize returns at or below those of passive investors, active managers tend to thrive during recessions.
Passive investors tend to form their portfolios based on market averages. By using a mix of mutual and index funds to create a diverse portfolio, passive investors are trying to slightly beat market averages over long periods of time. Timing is a non-factor for passive investors due to their buy-and-hold strategy where speculators enter positions that have long time horizons. Of course, this method requires more discipline to not act when short-term market opportunities present themselves. Most of the time, passive investors only adjust their portfolios to balance their holdings according to what they want to see. Looking at historical figures, passive investors do much better over longer periods in time but fail to capitalize on short-term opportunities.