Passive or active investment: which strategy to choose for an investor

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Passive investment is a long-term strategy in which investments are acquired and held over a long period of time. In passive investing, investors prefer to keep a diverse portfolio, counting on a steady growth of its value over time. Such investments do not require constant attention, but bring regular income.

Features of passive investments

One of the methods of passive investing is index investing. The index reflects the performance of all companies on the market. In this case, the funds are invested in a portfolio that repeats the structure of a certain market index, including stocks, bonds or other assets. The state of the fund directly depends on the growth of prices in the market. The investor himself only needs to choose an index fund, the index serviceman will do the rest for him. If you are a passive investor, we recommend considering options for investing in ETFs.

Passive investors spend less time and resources on the choice of assets, securities and stock analytics. Instead, they are focusing on creating a balanced and diversified portfolio.

Who is more suitable for passive investing?

You have no experience to study this area on your own, and you want to shorten the adaptation process as much as possible and start investing right away.
You don't have time to monitor the markets and constantly manage assets.
You do not seek to overtake the market, and are ready to earn less, but with less cost.

Pros and cons of passive investments

Advantages

Low entry threshold. You can start investing with small amounts. This makes passive investment accessible to people with different income levels.
Accessibility for beginners. A passive investment strategy does not require deep knowledge. It will suit even those who are just starting to understand investments.
Savings on commissions and taxes. Since you do not make frequent transactions, you spend less money on brokers' commissions and taxes.
There are no high risks. Passive securities portfolio management assumes that you are investing in a broad market or index, which helps to distribute risks. This reduces the likelihood of large losses due to problems in one particular company or sector.
It doesn't take all the time. Because you won't devote all the time to investing.

Disadvantages

Not so high income. The passive portfolio does not imply huge figures, as it is aimed at stable growth.
Strict plan. Passive investors follow a pre-selected strategy and rarely deviate from it. This limits the ability to respond quickly to market changes or economic events.
Slow reaction. It is much more difficult to respond to crisis situations in time if the investor himself is not involved in the portfolio.

What are active investments. "Aggressive" approach

Active investment is an investment strategy with a high level of risk and high profit potential. This strategy is the opposite of the passive one, as it suits investors with risk tolerance and those who are ready to pay more attention and time to the investment portfolio.

For such investors, there is a great chance to join the exclusive MOST Investor's Club community. The club brings together investors, providing them with the opportunity to co-finance, and also organizes educational and networking sessions to help novice investors gain knowledge about investments. You can leave an application for participation on the website.

Features of active investments

If a passive investor buys an asset and expects its value to increase, an active investor constantly participates in management, understands finances, monitors the market. He constantly monitors the situation, studies the financial reports of companies, analyzes economic and market trends to find the best investment opportunities. An active investor should be ready for constant training and adaptation. This may include the study of new financial instruments, strategies and technologies.

An active strategy also involves high profits, not only within the average market income, but much higher. It is the risk that gives the potential for significant profit.

Active management includes mutual and exchange-traded funds, portfolios of shares, bonds.

Pros and cons of active investments

Advantages

Flexibility. Active investors can quickly change their investment decisions in response to changes in the market situation. For example, if news appears that affects the value of shares, an active investor can immediately buy or sell assets to maximize opportunities or minimize losses.
Variety of investments. If ETFs and BPIFs are mainly suitable for passive investment, then much more options, such as venture investments, are added to "aggressive" investing.
High profit. Successful investments in fast-growing companies or timely use of market opportunities can bring significant profits.

Disadvantages

Time and effort. Successful active investing requires an understanding of financial markets, data analysis skills and awareness of current economic events. This activity requires significant time and intellectual costs. If you are not ready to devote enough time to it or do not have enough experience, there is a high risk of making wrong decisions, this strategy in the securities market can lead to losses.
Costs. Profits from short-term transactions are usually subject to higher taxes.
High degree of risk. You must have a high tolerance for risk and willingness to accept possible losses.

You can learn more about risky investments in the article "What is venture investment: investment features, advantages and disadvantages".

Which strategy works better and which one to choose?

Active and passive investment: what is better to choose? Let's turn to statistics.

A S&P Global study showed that during the 20-year period ending in 2022, only about 4.1% of professionally managed portfolios in the United States consistently outperformed benchmarks. Accordingly, according to statistics, it is much more profitable to invest passively, because the risks are too great.

However, we advise combining these two approaches, like diversification. The combination of these two types of investments can further diversify the portfolio and help manage the overall risk.

If you are ready to take risks and are aimed at high profits, take a closer look at venture investments. MOST Ventures is a private venture fund in Central Asia. We choose the most promising technology startups that develop innovative and popular products and provide funding for their quick entry into global markets. Apply on our website to join the fund!