Active Vs Passive Investing: Why Now Might Be The Time To Switch

Are you tired of hearing that passive investing is the only way to go? I know I am; I despise the term. Nothing is really passive because life is dynamic.

Active vs Passive investing is a long debated topic, and while passive investing has its merits, now might be the perfect opportunity to roll up your sleeves and get active with your investments.

With the world full of exciting new technologies ripe for the picking, taking an active approach, at some level, can help tap into these opportunities.

And here’s the best part: getting active doesn’t have to be overwhelming or time-consuming. Even small steps can make a big difference, like hand-picking a few stocks or funds that pique your interest.

So why not embrace the opportunity to learn, grow, and take control of your financial future?

But first, what are we even talking about? Let’s get on the same page.

What is Active vs. Passive Investing?

Let’s be clear: when it comes to investing, I’ve always enjoyed learning about it. It’s like a massive puzzle that always requires finding a piece. I’m fascinated by it.

The puzzle now is how to invest into AI, right?

Now, I do get the appeal of passive funds. It’s easy. Master a skill with a job and pour that extra money into your account every month.

That is completely understandable, but just know that it’s not always sunshine and rainbows because the markets are cyclical.

Look at active versus passive funds’ cyclical nature and performance over different periods.

Think about this… even if you like passive strategies like investing in a real estate fund, it takes some active management to keep up with your investment, read about the activity, and feel confident that you should put in more money, no?

Reasons You Need to Know About Active vs. Passive Investing

We are in historic times.

AI is revolutionizing how we work and live, and we are supposed to believe that traditional asset allocation is supposed to get us to our goals.

The often-discussed 60/40 portfolio was crushed in 2022, with the low historic interest rate.

Whether you’re saving up for something important or just want to grow your money in a smarter way, understanding the difference between active and passive investing is super important.

Making the right choice can help you reach your goals faster and make the whole process a lot less stressful.

Why Is This Important?

• Control Over Your Investments: Active investing gives you the chance to pick and choose where your money goes and get better returns. If you like having control and learning as you go, active investing could be a good fit for you.
• Lower Costs: Passive investing is known for having lower fees, which means you get to keep more of the money you make. BUT with zero fee online brokers, this has made this a non issue.
• Market Conditions Change: There are times when active investing can do better, especially during tricky times like right now with the bond market struggling. Active investing can take advantage of special opportunities when the market isn’t doing great.
• Fits Your Personality: There’s no single right way to invest. Some people like to be in control, while others prefer a hands-off approach. It’s important to choose an investing style that matches your personality and how much time you have.

If you want to build a strategy that works for you and makes the most of the market’s ups and downs, it helps to know when each approach is best.

Investing isn’t just about making money; it’s also about finding peace of mind with the choices you make.

Step-by-Step Instructions to Decide Between Active and Passive Investing

Passive investors don’t realize that active and passive strategies can even work together, and can help improve outcomes, while also being more conservative.

You might think it’s one or the other, but it doesn’t have to be.

Let’s break down how to figure out which strategy (or combination) is right for you. We’ll look at your goals, personality, and the current market conditions so you can create a plan that’s just right.

The Path to Your Best Investment Strategy

1. Know Your Personality – Are you someone who loves thrills or are you more of a “slow and steady” person?
2. Look at Your Schedule – How much time can you spend managing your investments? Be honest—it will help you avoid mistakes.
3. Check Out the Market Conditions – Is the market unstable right now? If it is, there might be more opportunities for active investors.
4. Think About Costs vs. Returns – Active investing usually costs more—will the extra cost be worth it for the returns you expect?
5. DIY or Hire Someone? – Do you want to do it yourself, or get someone else to manage your investments? DIY can save money, but takes time.

Let’s take a closer look at each of these steps.

Step 1: Know Your Personality

If you get excited by taking risks and following market trends, you might enjoy active investing. But if the idea of losing money makes you nervous, a more predictable approach might be better.

You need to be honest about what makes you comfortable. Are you the kind of person who likes to check the market every day, or would you rather set up an investment and not think about it for years?

Knowing how much risk you can handle will help you make the right choice.

Step 2: Look at Your Schedule

Active investing takes some time. Are you willing to spend weekends following financial news, or do you want more free time?

Be real about your time. If you have a busy job or family responsibilities, a passive approach might be easier and less stressful.

Active investing means keeping up with news and learning new skills, while passive investing doesn’t need as much attention.

Step 3: Check Out the Market Conditions

Right now, bonds are in a rough patch, and interest rates are no longer at record lows.

Times like these can mean more chances for active investors to do well. If you can spot opportunities in these kinds of conditions, active investing could be good for you.

Being able to see trends in the market and take action is key here, especially when things are unpredictable.

Step 4: Think About Costs vs. Returns

Passive investing is cheaper, period. But sometimes, active investing can make enough extra money to be worth the extra costs.

It’s important to look at fees and tax impacts. If active investing costs a lot but can give you much better returns, then it might be worth it. But remember, active investing doesn’t always guarantee higher returns, so be careful.

Step 5: DIY or Hire Someone?

If you want to save money, you could manage your investments yourself. DIY gives you control, but it also takes dedication.

It’s not for everyone, but if you like learning, it can work.

Doing it yourself also means you have to stay calm and avoid emotional decisions. A professional can bring in expertise, but they’ll also add extra costs that you need to think about.

Key Considerations for Successfully Implementing Your Strategy

• Diversify: No matter which way you invest, don’t put all your money in one place. Using a mix of strategies is often best. Diversification helps spread your risk and keep you safer.
• Costs Add Up: Fees can take a big bite out of your returns over time. Make sure that the money you might make is enough to cover the fees you’ll pay. This is super important with actively managed funds that have extra costs.
• Manage Your Risk: Active investing can be risky, especially if you’re new. Start small and learn as you go. Not every strategy works in every market, so it’s good to have a plan to limit your losses.

Taking it to the Next Level: How to Combine Active and Passive Approaches

You don’t have to pick one and forget the other. A lot of investors use something called a core-and-satellite approach.

Most of the money (the core) is invested passively in index funds, while a smaller part (the satellite) is actively invested to take advantage of specific opportunities. This mix keeps costs low but gives you a chance for extra gains.

For example, you could put 70-80% of your money in a low-cost index fund and use the rest to invest in up-and-coming tech stocks. That way, you get the stability of the market while still trying to earn a bit more.

Another way to do this is to change the mix depending on what’s going on in the market. If things are uncertain, you might put more into passive investments. When the market looks good, you could move more into active investments to try to make bigger gains.

Alternatives to Active vs. Passive Investing

If managing your investments sounds too complicated, there are other options.

Robo-advisors are great for people who want a mix of low costs and some personalized advice. They use algorithms to create a portfolio for you and make adjustments based on your goals and risk level.

Or maybe you’re interested in real estate. Real estate can also be a passive investment if you use rental property management services.

I’ve always liked to hold some of my wealth in real estate, and found real estate funds to be a nice vehicle to do so.

You could invest in Real Estate Investment Trusts (REITs), which let you invest in property without the headaches of being a landlord. These can be through the public markets and/or funds like Fundrise.

Bottom Line

The fight between active and passive investing isn’t as simple as some make it out to be.

Both have their benefits and times when they work best. And guess what? I’ve tried both!

When the market is unpredictable, I’ve found that being active can really pay off, especially with things like bonds or tech stocks. But when I get busy, a passive buy and hold is my safety net—steady and reliable.

The key is to find a balance—knowing that there’s no single best answer.

The core-and-satellite approach works well for me because it lets me dive in when I see a good opportunity but also keep things simple when I need to. In the end, your investment plan should match your goals, your personality, and how you want to live your life.