Active vs Passive investing for beginners
Stephen Grootes and investment experts explore the key differences between active and passive investing while explaining how these strategies coexist and shape the market.
Stock market Shares Investing, Image: Pixabay
There’s a long list of jargon to get through when starting your investing journey, but when it comes to your investment style, there are only two that you need to fully understand: Active and Passive.
Although the debate on which strategy is better is an ongoing battle, it’s up to the individual to decide which path leads them closer to their financial goals. To break down the differences between Active and Passive investing, and how they can be utilized by investors, Stephen Grootes speaks to François Smith, Client Portfolio Analyst at Stonehage Fleming Investment Management and Hlelo Giyose, Chief Investment Officer and Principle at First Avenue Investment Management.
Learn more in this episode of Investment School, brought to you by CFI, an Authorized FSP.
Here are some of the key differences between Active and Passive investment.
Active Investing
- More flexible and nuanced approach
- Requires frequent attention to the market (eg. Day Traders)
- Deeper analysis and research, often by a portfolio manager and team of analysts
- Higher cost and higher risk
- Great profit margin when managing to find an outlier and beat the market
“It’s no different than record companies. How many artists out there have record deals compared to how many have become top-selling artists? Record labels pay these artists for the chance of getting the next Michael Jackson or Beyonce. Why should asset management be any different?” – Hlelo Giyose on the risk of active investment
Passive Investing
- Often buying indexed or mutual funds
- Less buying and selling
- Long-term financial goals
- More cost-effective
- Requires patience and resisting the urge to react to the market
- Tax efficient
“Investing is inherently an uncertain endeavour, and costs are a part of it that is certain. So, if you are a client who’s collating a portfolio, it is something to be conscious of. Costs are one of the components that can be controlled and are truly important.” – Francois Smith on the costs of investing
Historically, passive investing has shown more success than active, but many experts advise that a blended approach is the most beneficial. Combining the patience required for passive investing, along with the attention to detail and flexibility of an active investor, could lead to better navigation of the market.
To start your active or passive investment journey on an accessible, educational, and digital platform, head to the official CFI South Africa website.
You can also stay up to speed on the ever-changing world of investing by tuning in to Investment School, brought to you by CFI, every Thursday on The Money Show with Stephen Grootes (6pm-8pm).
Empower yourself with CFI and start trading today. Visit cfi.trade!