Active management requires constant purchasing and selling to exceed a set benchmark or index. On the other hand, passive management replicates a specific benchmark or index to equal the performance. Unlike the active investment manager who sells assets as soon as they buy, passive managers purchase and hold assets long-term.
There is no winner or loser in active vs. passive investment. Several conditions inform the suitability of a strategy.
Investment Objective
If you want long-term benefits - things like retirement savings, passive investment is the best option for you. However, active investment management is the best strategy to make profits quickly. Active investment managers rely on short-term price fluctuations to buy or sell assets to make quick yields.
Affordability
Active investment management is more expensive than passive management. The difference in pricing is because passive investment does not require security analysis in indexes. Passive investments also have low trading volumes, which decreases prices for investors.
Additionally, passively managed funds need little research and maintenance. Therefore, they have lower expense ratios than most active funds.
Risks
Active investment management has high risks because of portfolio diversification. Passive investment needs minimal diversification. In addition, it requires the expertise and experience of an investment manager because one wrong move could obliterate substantial gains. Therefore, the risk of losing an entire portfolio is low.
Flexibility in Dynamic Markets
Active investors get defensive strategies like money and government bonds when the markets are down as a buffer against catastrophic losses. Investors can also migrate to retain more equities in growing markets. Their proactive approach to market conditions enables investors to make short-term gains.
In passive investment, there is no exit strategy. When the market becomes volatile, there is no guarantee of quick recovery. Investment managers advise on continuous asset revisions.
Trading Options
Active portfolio management comes with additional trading options. Active investment strategies like hedging or short selling increase the odds of outperforming indexes. Active investment experts apply such techniques efficiently.
Tax Management
With the help of an active investment manager or an investment advisor, you can offset gains for tax purposes with active investment. Tax-loss harvesting is also possible in passive management, but they never get immense capital gains tax. However, the volume of trading in active investment provides more possibilities for massive tax-loss harvesting.
