Whenever there’s a discussion about passive vs active investing, you’ll see heated arguments from both sides of the aisle. However, active vs passive active investing isn’t only a polarizing topic – whatever side you pick can have an enormous impact on your financial success.
With that in mind, let’s look at the facts behind both, so you can better determine which will help you as an investor:
What is “active investing?”
As the name implies, active investing involves taking an active approach to your investment strategy. In a nutshell, it means you’re constantly taking steps to beat the stock market, such as selling investments you think will drop in the short-term, or loading up on others you think will go up in the near-future.
The complexity and methods of active investing can widely vary (as can the results) – everyone from a team of quantitative analysts to someone reading the newspaper can attempt to actively beat the market.
What is “passive investing?”
As you probably surmised, passive investing involves a more inactive approach to beating the market. Essentially, this means buying for the long-haul, and sticking to your investing goals for years – or even decades – to achieve long-term success.
Much of passive investing is based on the theory that many investment vehicles, such as equities, have always had a historical tendency to increase in value over time. Passive investors attempt to ride out short-term drops and volatility to achieve this long-term growth.
While it might sound like passive investing is much easier, it requires a mental aptitude for patience, and a strong ability to stay rational. Take the global financial crisis, for instance – even seasoned investors found it extremely difficult to stay in the stock market when it lost nearly half its value between 2007 and 2009.
Passive vs active investing: the facts.
When it comes to passive vs active investing, you’ll find plenty of opinions on the effectiveness for both, but the cold hard facts tell a different story. Let’s look at the aforementioned financial crisis:
If you had $100,000 invested in the stock market, it would’ve plummeted to $54,381 by February 2009. Although this would have seemed like a prime time to attempt active investing, if you had stayed with your long-term investment plan, your portfolio would’ve soared to $172,425 over the next 70 months.
If you’re wondering how much an active approach would’ve yielded instead, look no further than MorningStar (a major investment research firm), which found that investors lose an average of 2.5% of returns every year when they attempt to time the market.
The answer for passive vs active investing is clear: if you’re invested in a well-diversified portfolio and want to achieve your long-term goals, then you should take a prudent, passive approach. While you may miss out on the occasional big win as a passive investor, the evidence shows that you’re far more likely to achieve your goals over time.
Learn more about long-term investing
At LexION Capital, we help our clients achieve their long-term goals through bespoke, diversified long-term portfolios. We can craft a rational, long-term plan to help you achieve your financial dreams. If you’d like to learn more, schedule a conversation with us today.