“Active investing is like betting on who will win the Super Bowl, while passive investing would be like owning the entire NFL, and thus collecting profits on the gross ticket and merchandise sales, regardless of which team wins each year.”1
Unlike most mutual funds, an index fund does not have a fund manager making active decisions about what to buy and sell each day. The job of the people running the index fund is to closely track its underlying "basket" of securities - that is all. For example, all of the large companies in America. Or all of the publicly traded real estate investment trusts. Because of this, it is called a "passive" investment. Most mutual funds are considered "active" investments because fund managers are deciding what securities to buy and sell.
Active investing is primarily based on trading stocks and beating the stock market’s average returns. It may be costly, as portfolio managers can charge high fees. Active investing relies heavily on the portfolio manager assessing the “right” time to buy or sell. Active investing often includes a high-risk factor, so you will have to assess your tolerance for risk.
A passive investor invests for the long haul, evaluating growth over time. As there is no stock picking, fees can be extremely low. Passive investing is transparent and tax-efficient. It's not a get-rich-quick strategy, but instead one which seeks to invest over time with reasonable risk to increase wealth.
Your One Day In July financial advisor can answer any further questions you may have about active vs passive investing and the enormous implication our process can have on your wealth.
1. “Comparing Actively Managed Funds Vs. Passive Investing,” www.thebalance.com, 3/21/19.
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