Active and Passive Investing: Is there an alternative for self-directed investors?
There’s an allure to hand-picking stocks with the hopes of finding the next big one. No thanks to the financial media, there is a fear of missing out – but the simple truth is that it’s very difficult to outperform the market. Even actively managed funds struggle to do so.
Most individual investors should be focused on building and managing a well-constructed portfolio instead of individual stock picking. The way investors typically manage their portfolios falls into two main styles:
Active management, where the individual investor or portfolio manager is strategically buying and selling securities with a goal of outperforming the broader market. In this case, the securities are either hand-picked by the investor, or they pay others to pick the securities that are market-beating.
Passive management, the opposite management style, is where the individual investor buys assets in order to participate in long-term capital appreciation without a particular view on any individual security's short-term outperformance. Passive investors typically use broad-based and inexpensive instruments like ETFs or index mutual funds in order to get exposure to a wide variety of underlying securities. Though not looking to capture short-term fluctuations in value or time markets and events, good passive investors will occasionally re-tune their exposures and rebalance their held positions. Our partner Passiv has a great guide on portfolio rebalancing that will help you get started.
What are the pros and cons?
For most individual investors, the cons of actively managing your investment portfolio outweigh the pros. Though investing and ultimately seeing the biggest return is important, the amount of time and resources needed to compete with institutional investors is often unrealistic. For all but the savviest and most dedicated individual investors, professionals will often exploit opportunities and spoil returns before said investors have the chance to benefit. Even if you believe in the promise of active management and want to hire someone to invest on your behalf, there are only a few great portfolio managers out there, and are nearly impossible to access. Settling for hiring a subpar manager will ultimately lead to a situation where the fees outweigh the returns.
Self-directed Investors can achieve more
At Global Predictions, we think there is a third strategy that nicely blends the pros of each of these two traditional investment strategies. In fact, we feel so strongly about this approach that we’ve built an individual wealth management platform, to allow individuals to take advantage of this strategy.
We think a Hybrid Investing Strategy is best for individual investors as it allows them to
- Enjoy the time savings and cost savings (i.e., fewer transaction costs, no exorbitant management fees).
- Match their risk and protect their downside, leading to building more confidence as an investor.
- Re-position your portfolio periodically to take advantage of medium-term economic trends to earn better returns.
Learn more about this superior Hybrid Investing Strategy here.