Written by R. A. Stewart
What is the difference?
I was watching a man from Fisher Funds explaining this to a breakfast TV presenter in New Zealand and this is how he explained it.
An active investor is one who picks and chooses stocks which he thinks will out perform the market.
A passive investor invests in a range of companies; in other words diversifies in order to minimize risk.
He made the point that the tech sector is a growing industry which has taken a greater share of the market which means that diversification is less of a benefit if you want your portfolio in traditional stocks.
There are drawbacks to being an active investor, and they are as I see them:
- An active investor makes more transactions and because of this they pay more in transaction fees. That may be an obvious statement, but a factor which is overlooked.
- The active investor has to do their research, whereas the passive investor leaves that to their fund manager.
- Being an active investors requires constant monitoring of stocks and this all takes time out of your day. Not everyone has that kind of time available to do this.
- An active investor must use their own judgement as to what is the right time to sell and this is where some people trip up because emotion often gets in the way of a person’s better judgement. Some people panic when shares drop and sell at a lower price than what they paid for them or hang on to the share for too long in the hope that it will keep rising and the share price starts sliding.
A passive investor buys and holds on to a diversified portfolio, often in ETFs or index funds. These are also called Managed Funds.
These rely on long term growth and usually mirror the market depending on how well the fund is performing.
Passive investing is a lower risk approach to investing because funds are invested in a wide range of industries.
An investor can be both an active investor or a passive investor. He can have a diversified portfolio in his retirement fund which makes him a passive investor and at the same time invest in certain companies on an online investing platform such as Sharesies, Hatch, Robinhood, or Kernel Wealth.
But just because you are investing in individual companies on Sharesies, it does not necessarily mean that you are an active investor. You may have no intention of selling your shares in the foreseeable future so that will make you more of a passive investor than an active one.
About this article
The contents of this article are of the opinion of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your blog/website, or ebook.
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