As a moderate-risk investor, you are seeking long-term growth of your wealth, apart from your income. You have a mindset where you are more open to accepting more significant losses in the short-term considering your focus on the long-term returns. Let’s consider a few insights that align with your financial strategy.
Active vs Passive Investing
How to identify which is right for you?
This discussion has strong supporters and endorsers on both sides. In a nutshell, active investing entails a more involved approach, usually by a portfolio manager. It requires a high level of market analysis to beat the market. Passive investing involves less buying and selling and usually results in investors buying index funds. If you identify with being a passive investor, your investment strategy is focused on long-term goals.
Flexibility: Allows for quick movement of assets when the market is volatile
Customization: Can be tailored to include investments chosen by the manager of the portfolio
Higher potential to outperform the market: By stock-picking, managers can exit specific stocks or sectors when the risks get too high
More expensive than passive investing: Fees are higher because all that active buying and selling triggers transaction costs and for the effort of the analyst team
Increased risk: When analysts are right, you stand to win big, but if their predictions are wrong, it can drag down the performance of your entire portfolio
Less expensive than active investing: Lower trading volumes related to passive investing lead to you paying lower fees. The charge for passively managed funds is lower than most active funds as there’s very little research and upkeep required
Decreased risk: It offers easy diversification of your portfolio and decreases the likelihood of a negative ripple effect on your whole portfolio from one poor-performing investment
Increased transparency: With passive investments, what you see is what you get. It is always clear which assets are in your basket
Less flexibility: The selection in this type of investing strategy is limited and does not offer much variance, owing to which as a passive investor, you will be locked into those assets, irrespective of what happens in the market
More susceptible to market changes: That would mean each time there is a shift in the market, your portfolio will feel the effects of it
It’s important to speak to a reputable financial advisor to understand which investment opportunities suit your lifestyle and risk appetite.
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