Passive vs. Active Investing

There are two fundamental schools of investing: active and passive.

Active investing is trying to outperform the stock market by picking stocks. You pick stocks that you expect to rise in price; you do this according to various theories of what will affect their value in the future. Warren Buffett is a well-known and successful active investor. He identifies the value in stocks before their prices rise.

Passive investing is trying to match the performance of a market, rather than beat it.

Successful active investors spend time reading financial releases, studying industries, speaking to company management teams, and performing complex calculations to identify stocks they hope will go up.

Passive investors don’t study the thousands of companies they could invest in. They also don’t trust their gut to help them win the lottery.

They simply hold an index fund, which is a reflection of the economy, and they trust the economy to grow. Passive investing tends to be a far lower cost strategy, in terms of time, labour and transaction fees, since you can buy one instrument and hold it until you retire.

Finding stocks that will rise is fraught with risk, and extremely time consuming. Even where some investment firms are able to find stocks that will rise, the rise in those stocks is cancelled-out by the fees you pay to invest in them. That’s one reason why hedge funds usually have returns lower than the whole stock market, which you can own with the push of a button and not undertake any study.

The solution is to invest using a portfolio of low-cost exchange-traded funds that broad markets and asset classes like bonds. You can see the portfolio that SunburstAfrica recommends by signing up here.

 

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