There are multiple investment styles suitable for different investors. They depend on your lifestyle, goals, investment amount, and the knowledge of investments you have. There is no single investment style that is fit for all. You choose one depending on your goals and investment criteria.
All investment styles fall under two major categories-active investing and passive investing. These are two contrasting strategies that can be used to make your money work for you in the market.
In this article, we will help you understand the difference between the two and explain the advances that passive investing has over active investing.
What is Active Investing?
Active investing is an investment strategy that involves regular trading with an intention to beat the average index returns. It is a hands-on approach to handling your investment portfolio.
You can do it from the comfort of your home but it will require an understanding of market analysis and expertise to determine the right time to buy or sell the investments.
It needs constant attention and regular tracking of the stock market. It is an investment strategy that may not be suitable for everyone. At New Era, we recommend that you have a percentage of your investment funds with an Active Asset Manager.
What is Passive Investing?
As the name suggests, passive investing is an investment strategy where you buy and hold assets for a longer period of time. It is a hands-off approach where you choose the investments and hold on to them through the ups and downs of the market.
It involves investing in solid, return-generating assets and holding on to them for long-term goals like retirement. Passive investing is a set-it-and-forget-it approach that does not require constant attention.
Is Passive Investing Better than Active Investing?
There is no specific strategy that can fit every investor. What works for you may not work for someone else. The investing strategy ideal for you will depend on your situation since both are unique in their ways. However, if you are looking to do less work and have little knowledge of investing, then passive investing is the way to go. Let’s take a look at its advantages.
Advantages of Active Trading using multiple strategies
Decreased risk
Since you are not buying and selling every day, the overall market risk is low. As you hold the investment for a longer tenure, the impact of market volatility on your portfolio reduces.
Lower costs
You reduce the cost of investment through passive investing since you do not buy and sell your assets regularly. You only incur the cost when you buy assets and as you hold them for the long term, the cost of investing is low as compared to making regular transactions in active investing.
Higher average returns
The market can be uncertain but holding on to an asset for a few years can lead to higher average returns. Historically, the market moves up after it drops and if you hold on to the assets despite the ups and downs, you take home higher returns.
Passive investing is an ideal way of generating long-term returns at low cost and with minimal effort. It is an ideal strategy for beginners and those with long-term goals like retirement.
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