ACTIVE VS. PASSIVE INVESTING
Investment means making our savings work for us in terms of a return, it means putting money in suitable products; Savings refers to the cash that has been parked safe and in liquid form.
The biggest difference between saving and investing is the risk of loss of capital
When investment is considered, there are two types of investments: passive investment and active investment.
A passive investor invests for a longer duration, they also have a ceiling to the amount of selling and buying that they do within the realm of their portfolio, thus this becomes an economic way of investing.
Passive investment needs a mentality where buying and then holding the stocks is required. Thus, it refrains from the trends of the stock market and any reaction to the changes in the trends.
Active investment needs the investor to have hands on experience and knowledge of the market and it needs someone to manage the portfolio. The prime aim is an active money management to win over the stock market’s returns on an average and to take complete benefit of the short term price increases and decreases. This involves a lot of study and research to comprehend the performance of the stock, bond or assets and this decides the action that needs to be performed. The portfolio manager needs to analyse or seek professional help, considering the qualitative and quantitative factors and then some forecast needs to be done to estimate the change in prices.
Active investment needs a lot of courage and determination, it requires confidence too. A lot depends on the decision that it taken regarding the right time to buy or sell. The ratio of being right more number of times than being wrong determines the success of the portfolio manager.
Passive or Active Management – Which is a better method
There has been a lot of debate considering which investment is a better option. The best part about active management is the ability to perform better than the index due to superior skills. This can help in making well thought of decisions considering the experience, knowledge and the ability to gauge opportunities that can lead to better and superior results. If the portfolio managers forecast that the market might go slow, they would adopt defensive measures by increasing the cash positions to minimise the effect on their portfolio. The disadvantage is that the active investment includes a lot of cost, in case if the portfolio managers take a wrong decision it results in a worse performance.
The prime benefit of passive investment is that it is in sync with the performance of the index. It involves very less decision making prowess of the manager. The manager only works on the index that has been selected and tracks it as closely as possible. This paves the way to a declined cost of operations. The passive investment would never perform less than the tracked underlying index. The portfolio managers do not take a call if they realise that the market would go slow or fall.
This heated debate has had a compromise and about 60% of the portfolio managers prefer a mix of passive investment in the broader markets and active investment in narrow markets.