When it comes to comparing active vs. passive investing and determining which investment method is best, the answer isn’t as clearly cut as you might imagine.
Everyone has very different risk tolerance levels, so it’s important to understand your own preferences and investing goals before you choose between active and passive investing choices.
Actively managed investments, such as mutual funds, try to beat the market performance of a benchmark index, such as the S&P 500, by choosing the best 100 or so performing stocks based on a likelihood of receiving good returns.
A passively managed investment will simply accept that market performance is what it is and invest in all 500 stocks on the index.
Many investors wonder what the better option is for their own investing goals. Once again, it does come down to the individual investor’s personal levels of risk tolerance.
The level of risk you’re willing to take with your hard-earned money can often determine how you’re willing to spend and invest. After all, higher risks can often yield higher returns. Unfortunately higher risks can also compound losses too.
Low risk might equate to lower returns, but it’s commonly believed that a low guaranteed gain is far better than a risky bet on a higher risk return that may not eventuate.