Active Vs. Passive Investing: Which Is Better?

The short answer is that passive is probably better, at least if you want to hang on to your money. But before you can truly understand why one type of investing is more advantageous, you first need to know what separates these two types of investment options and consider your own personality and motivations for investing. You probably already know the difference between being active and being passive. For example, you might consider yourself physically active if you go to the gym, jog, play team sports, or even do yoga or Pilates on a regular basis. Your definition of passive, on the other hand, could involve sitting on a couch and watching TV rather than getting out and moving your body. But how is passive investing better than active? Wouldn't it be better to actively control your financial interests?

The problem here is that active investing doesn't necessarily enjoy the same positive connotation as, say, being physically active. An active investor is one who purchases stocks, bonds, and so on with the intention of trading. But would you purchase a family home one day and sell it the next just because someone offered you a couple thousand dollars more than you paid? Probably not. You wouldn't uproot your family just to make a quick buck. And yet, you very well might see that the price of the stock you own has gone up a few cents in the last 24 hours and sell it off to invest in something else. The issue here is that active investing qualifies as risky behavior, akin to gambling.

Active investors think that they can control the market. But this is a fallacy. No amount of monitoring the stock market, researching investment opportunities, or analyzing data can deal you the winning hand when it comes to investing. If you're going to play the market you had better be prepared to lose everything you put in. Of course, there are people that seem to have a knack for getting in and out on a stock at just the right moment. But these individuals have likely had their fair share of losses along with gains. And while you could be right occasionally, it's really only a matter of time before you suffer a loss, and it could be major. Even if all of your research points to a winning stock and you think you have your timing down pat, there's no guarantee you'll come out ahead. Not even those who engage in illegal practices like insider trading emerge unscathed (just look at Martha Stewart).

So what makes passive investing different? Passive investors are those that do their homework in order to find investment opportunities that are relatively safe and stable for the long haul. They make their purchases and then sit back to watch them grow. They may have a diverse portfolio and make infrequent trades as a way to keep it balanced. For example, if stocks drop and bonds rise in the course of a year they might purchase more stocks in order to preserve their original ratio of stocks to bonds. But they won't leverage the long-term security of their investments on a hot stock tip just because it could make them a few quick bucks. They won't buy gold online, wait for it to go up a few cents an ounce, and then sell and move on to the next thing. The payoff for this strategy is a better shot at long-term growth in your portfolio. It might be slow going, what with market fluctuations, but over time you are likely to see your initial investment increase.