You’ve probably heard the terms “passive” and “active” investing before. What do they mean and are they important words for you to understand? Let’s take a few minutes and try to understand the answers in a way that can help you make better investment decisions.
What Does “Passive Investing” mean?
This relates to the degree to which you manage your investment portfolio. If you hire a manager to buy and sell your holdings, you are a passive investor. If you manage your own money and buy and hold your positions you are also a passive investor because you aren’t really involved. Real estate can be another example of passive investing if you buy a rental and hire a property manager. In short, passive investing really means “hands off” investing.
What Does “Active Investing” Mean?
If you are very involved with managing your investments, you are an active investor. If you replace certain funds at certain times with other funds, that’s consider active. And if you are involved in the management of your real estate that is another example of active management.
The Confusion De-Mystified – Investor vs Investment
If you really want to understand these terms it’s crucial to differentiate between the investor and the investments. For example, a passive investor might buy and hold funds that are actively managed. That would be the case if the investor buys and holds a fund that buys and sells positions as the fund manager deems fit. In this case the investor is passive because she buys and holds but the investment is active because the fund manager is out there trading.
Likewise, if you buy and sell ETFs you’d be an active investor but you’d be trading passive investments because ETFs buy and hold securities. Does this make sense? It’s an important element in the discussion Pilgrim so let me know if you have any questions.
Which Is Better?
There is no one best investment approach. The truth is you have to find a suitable strategy that balances your own financial objectives with your need for “sleep at night”. Some people are willing to give up returns in exchange for less involvement. They cannot tolerate volatility so they buy, hold and forget. Still others want to be more active. They might use economic indicators to buy certain funds at certain times and sell others at other times. These are people who are looking for different kinds of returns (although no investment approach can guarantee future outcomes).
What kind of investor are you? What kind of investments do you hold?