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When it comes to passive vs active investing there is always a lot of passionate people there to debate for both sides. But the question that most people ask is which strategy actually makes you more money in the end? How do you know which strategy is right for you? If you had $1000 to invest, would it be better to put it in the hands of a financial adviser to make the decisions of what to invest in or would you be better off just going with index investing? Today I’m going to do my best to answer these questions and explain the advantages to both passive and active investing. As well as figure out which strategy is truly right for you.
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Passive Vs Active Investing – Which Is Better?
Investing has always been an essential part of building wealth and achieving financial freedom. However, there are different strategies and approaches one can take when it comes to investing. The debate between passive and active investing has been ongoing for years, with proponents of each style advocating for its superiority. So, let’s delve into the differences between these two investment approaches and assess which is better.
Passive investing involves a hands-off approach, where investors aim to match the performance of a market index rather than beat it. It typically involves investing in low-cost index funds or exchange-traded funds (ETFs) that track a specific benchmark, such as the S&P 500. With passive investing, investors believe in the efficient market hypothesis, which suggests that it is nearly impossible to consistently outperform the market over the long term.
One of the key advantages of passive investing is its simplicity. Investors do not need to spend extensive time researching individual stocks or funds; instead, they focus on asset allocation. Additionally, passive investing tends to have lower fees due to the nature of index funds. This approach also provides broad diversification, reducing the risk associated with investing in a particular company’s stock.
On the other hand, active investing involves a more hands-on approach, with investors aiming to outperform the market by selecting individual stocks or actively managed mutual funds. Active investors believe that with in-depth analysis and market insights, they can identify undervalued or overvalued securities and generate higher returns than the market.
The main advantage of active investing is the potential for higher returns. Skilled active investors, with thorough research and analysis, can identify investment opportunities that could lead to superior performance. However, it is essential to note that not all active investors are successful, and the market is full of uncertainties, making it challenging to consistently beat the market over the long term.
Active investing also requires more time and expertise. Investors must dedicate substantial efforts to research and ongoing monitoring of investments, staying up-to-date with market trends, economic indicators, and company-specific news. Additionally, active investing tends to be costlier due to higher fees associated with actively managed funds and frequent trading.
The ongoing debate regarding which approach is better revolves around two key factors: performance and cost. Studies indicate that over the long term, the average active investor tends to underperform the market, often due to higher fees and the inability to consistently beat the benchmarks. Passive investing, which focuses on low-cost index funds, has shown consistent performance over time. By investing in the broad market, passive investors capture the average market return, which is typically satisfactory for most long-term investors.
Nonetheless, it is essential to strike a balance between both approaches. Many investors opt for a hybrid strategy, known as core-satellite investing, which combines the benefits of both passive and active styles. In this approach, investors allocate a significant portion of their portfolio to passive index funds while allocating a smaller portion to actively managed funds or individual stocks to potentially outperform the market.
Ultimately, the choice between passive and active investing depends on an individual’s financial goals, risk tolerance, and time commitment. Passive investing offers simplicity, lower costs, and consistent performance over time, making it suitable for most long-term investors. However, active investing may be appealing for individuals who have the skills, resources, and time to actively manage their investment portfolio and potentially generate higher returns.
In conclusion, both passive and active investing have their merits. However, passive investing, particularly through index funds, continues to gain popularity due to its simplicity, lower costs, and proven performance over the long term. Regardless of the chosen investment approach, it is crucial to remain disciplined, diversified, and focused on long-term investment goals to achieve financial success.
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Vanguard STAR Balanced Fund: Active. 60/40. 29 year growth of 10,000 = $98,996.
Vanguard LifeStrategy Moderate Fund: Passive. 60/40. 29 year growth of 10,000 = $72,660.
It depends on where you are in your strategy
Everybody only thinks in terms of positive performance but where an actively managed mutual fund may really shine is during the bad times such as we're experiencing now. A good fund manager can help shield you from losses that a passively managed fund or ETF simply cannot. When you own an PM index fund or ETF you're stuck with how it's set, when the market is up you're up and when the market is down you're down, there is no in between. An active fund manager isn't stuck with a prescribed list of stocks and is able to make strategic decisions to help stop the bleeding during down times.
Great video.. But in your example, a 0.6% expense ratio for an index fund is extremely high. My Vanguard index funds range from 0.03% to 0.11% — which makes index investing even more attractive.
Enjoying your channel. Keep up the good work!
Before watching, guess passive, it removes emotions, remove emotions and emotions cost you every time
In my opinion, passive investing is great if you have less money to invest. You can buy and hold for a few years, eventually make some money, and not ever lose more than you can afford. It may not make you rich, but it's low-risk in the long-term.
You're = you are
passive investing gang
Thats IF they have ave return of 7% ALWAYS lol of course passive will be greater.
so is it safe to say – passive portfolio have zero beta?
Thanks for the video! it is quite informative. I have an tradional IRA account with Schwab. I did put in my kids as my beneficiaries on the site where it ask to list the names of beneficiries when I croak, lol! Would that be sufficient, or do I need to have it on a will or living trust also? I gave them a copy of the paperwork itself . Thanks!
Would be interesting to see if there are any passive vs retail-active studies out there. Passive vs actively managed funds seems like a no brainer to me but aside from psychological / emotional obstacles I wonder how many retail investors/ traders beat the market, especially when done in an account like a Roth IRA.
What should be the maximum expense ratio of a passive etf? 🙂 I found some etfs which were as high as %0.89….
My actively managed mutual funds almost ALWAYS beat my passive investments. It just takes a lot of reserach.
Sorry if my question is silly. But I want to know one thing. Passive investors earn from dividend and active investors earn from price fluctuations. If I'm right then do active investors don't get dividends ever? (and sorry for my bad English also)
Edit: thanks for this very well explained video.
passive investing the best!
Passive is the best strategy.
Unfortunately us passive investors need the active investors to appropriately value the stocks in our index funds…
Super. Did you think about passive investing? You can have your own machines. Check, if you have questions, write
So pay off my debt (and bills) while saving up a bit in a savings account. Have some money for a rainy day put aside maybe invest a bit to get an early start. Once debt is paid off put more into index funds (dividend) and saving but mostly dividend.
Write off what I can on my taxes. Do I need to open 2 other "tax free accounts" that I can get for retirement? How would I go about openingthem and what are the basics of what they entaile?
Modern civilization has a 3000 year history and these idiots use a ~100 years economic timeline to sell their nonsense. Past performance does not guarantee future performance, especially when you pick and choose data to support your bias.
Passive investors got cucked. Yes, everything goes up in a bull market. The mantra conveniently ignores crashes and downtrends. Buy low, sell high. Minimize risk. Expected value. You dont' need to pick individual stocks. You need to pay attention to wtf is going on in the world to avoid the wrecks like 2000, 2008-9, and 2020.
3:34 So the actively managed ones performed better at 5 years than at 4? Doesn't seem to make any sense.
This is a great breakdown / comparison video.
So, how would you start doing passive investing?
and now Fidelity offers ZERO expense funds… Index is the best way to go…
I wish expense ratio of index funds from where I am is at 0.5%! Here the lowest is 1% with some as high as 2.75 or even more.
Thank you for the advice
Is 1.4% really the average? Mine is 1% including platform and fund fees actively managed. Vanguard passive/index would be around 0.22%!
You're funny, i like your way of speaking. I gave your video a like 🙂
Passive wins because inside trading is required to be never shared so all brokers are just gamblers.
I think it's also important to remember the human element of your managed fund. If you're the manager of a mutual fund and the stock market crashes, you receive A LOT of pressure to sell. Think of it like this: You're mutual fund is given funds by highly irrational people. Let's say the market dropped by 25%. You, knowing that markets are cyclical in nature, hold on to you're current stocks. Your competitor though sells his Mutual fund and only takes a 15% hit. People are going to look at this fund and think it's safer because it managed to loose less money. Thus your mutual fund gets gutted and you get replaced because you we're wise enough to sell and take a smaller hit. This was one beef that Peter Lynch had with mutual funds in general and is what led to his famous statement that "anyone can beat the market".
It doesn't have to be all of one and none of the other. I have fun actively investing 5%-15% of my savings depending on what's going on in the market and what stocks I see as value at any given time. Some people go with 25% indexing, 25% bonds (or fixed income), 25% precious metals, and 25% cash. One's portfolio is always in flux and a balancing act as one get's closer to retirement and what Mr. Market is offering at any given time.
Want an outlier to actively managed funds? Ocean stone fund when it still existed.
In the aggregate, passive investing wins by definition. Because, other than fees, passive investing = the market, and because the entire market is the sum total of passive plus active, that means that, other than fees, the total returns on active and the total returns on passive have to be identical.
But since active has higher fees, that means the total returns on active AFTER FEES has to be less than the total return on passive.
If you beat the market following an active strategy, that can only mean you did it by some other active investor losing. If you're the market timer and you consistently beat the other market timers, then good for you, but if you're trying to do it by picking the best active mutual fund, it's pure gambling and the odds are against you. But all of the active investors put together trail the passive investors, because of fees.
Passive index fund investing should preform very well when the market is too efficient to exploit market undervaluation and overvaluation…..in short in an efficient market is made efficient by people trying to "beat the market" but in so doing they close the very opportunities and market inefficiencies that they seek to profit from……..
Without active investors the market would fall in efficiency, and this would probably cause make active investment strategies more profitable……profitable enough to make them worth the expenses again…..and without high market efficiency and variation passive investment would probably be returning less than active management less fees……..
However with today's very effective markets, with many investors with information, each using technology and trading advantages to compete, the passive approach I think is the best choice…..
Also should you be risk averse, the passive option is better…..or if you cannot afford the technologies, advisors, and services required for a competitive edge in active management.
Csn you do a review of Rule #1 investing
Index funds are king!
Interesting! I wonder, where do robo investors fit into the equation, apps like betterment and acorns, are they passive or active? I know they charge a fee but they mainly just reinvest your dividends for you and also keep your portfolio spread the way you set it. Would love your perspective on this, especially as I feel like they are new and not typically discussed in "real" investing videos. Thank you!
Hi, I started investing 2 months ago. I have some questions as a beginner that I couldn't find the answers in your video.
Which tools or companies to use to do investments?
What are the short term investment expenses(taxes, transaction costs) and how to calculate those expenses?
How to follow/read stock charts?
How to decide on a company to invest?
What is dividend and every how many months we get it?
Cool! I never knew the difference!