Passive vs. active investing

Passive investing continues to grow in popularity for several reasons: 

• Low cost - Index funds and ETFs are generally less expensive. Because they require less management, and expense ratios are lower. Knowing what you pay in fees is important because it can add up to a lot more than you think.
• Transparent - Passive investing is simple and easy to understand. If you are curious about the underlying investments, you can see holdings in both active and passive funds. 
• Tax efficient - Depending upon the type of account, selling investments may trigger a bigger tax bill. But passive investing generally involves less selling. So, it may not be as much of a concern.     

These are strong selling points, but there are shortfalls, too. There is rarely opportunity to outperform the stock market. And when the stock market takes a nosedive, it may be harder to cut back on losses. 

What is Active Investing? 

Some of the benefits of active investing may include: 

• May outperform the index - With the expertise and hands-on strategy of an experienced fund manager, it may be possible to earn better returns than the market. However, most managers have struggled to outperform their benchmarks on a regular basis. 
• Possible to reduce losses - No one can predict what will happen in the stock market. While there is plenty of upside potential, there will be down years too. In these scenarios, active managers may have the ability to reduce losses. 
  

Often, the biggest complaint about active management is the cost. It's a lot more expensive without the guarantee of better performance. Funds may also fluctuate when an analyst or manager changes firms. 

How To Choose Between The Two

You may be eager to decide whether active or passive investing is better. But like many aspects of personal finance, there’s no clear-cut answer. And it may change depending on your age, goals, net worth, and timeline.
 

When you are less experienced, you may prefer the simplicity of passive investing. With less to invest, low fees and transparency may be a good fit.
 

If your situation is more complex, or you have a higher net worth and are willing to take bigger risks for potentially greater rewards, you may need more custom options that come from active investing.

Your choice doesn’t have to be mutually exclusive. Because every asset class is different, you may like a buffet-style portfolio with a mix of passive and active investments. If the decision feels overwhelming, you can always talk with an investment professional for help and guidance.