Pure’s Senior Financial Advisor, Peter Keller, CFP®, AIF®, breaks down active and passive investing and discusses their real impact on retirement savings.
Transcript
If you’ve ever wondered what the difference is between “active investing” and “passive investing,” you’re not alone. Investing can be confusing, but today we’re going to simplify these terms and talk about their actual impact on retirement savings.
Active investing involves regularly buying and selling individual securities in an effort to outperform the market. This requires ongoing research and hands-on management. Passive investing, by contrast, relies on a long-term buy-and-hold approach, often through mutual funds or ETFs, with minimal buying and selling.
Each strategy has its strengths and drawbacks, making them suitable for different goals, risk levels, and market views.
For example, active investing can provide advantages such as flexibility and hedging. Since active managers aren’t required to follow a specific index, they have more flexibility in their stock selections. Additionally, active managers can hedge their bets using various techniques such as short sales or put options, and they can exit specific stocks or sectors when the risks become too big.
Some of the drawbacks of active investing are the costs and risks. Active buying and selling can trigger transaction costs, and fees can go towards analyst teams researching the equity picks involved in the trades. Another shortcoming is risk. Active managers are free to buy any investment they believe meets their criteria, however, fund managers are humans and can make costly investing mistakes.
Pivoting to passive investing, we see different strengths and drawbacks. For instance, some key benefits of passive investing are the ultra-low fees and transparency. Since no one picks stocks, the oversight is much less expensive and passive funds simply follow the index they use as their benchmarks. This also provides transparency because it’s always clear which assets are in an index fund.
When it comes to passive investing, some drawbacks include feeling too limited in options and returns. Passive funds are limited to a specific index or predetermined set of investments with little to no variance, and investors are locked into those holdings, no matter what happens in the market.
Additionally, passive funds will pretty much never beat the market, even during times of turmoil. That’s because their core holdings are locked in to track the market. Sometimes, a passive fund may beat the market by a little, but it will never post the significant returns active managers crave unless the market itself booms.
Between stocks and bonds, asset allocations and asset locations, passive investing and active investing, and so much more, it’s easy to feel confused and overwhelmed when trying to full grasp the intricacies of investing. That’s why we put together a quick guide on all the basics. Take advantage of this free download today to feel more knowledgeable and confident about investing.
If you’re ready for the next step and want to see if your investments are on track to help you achieve the retirement you want, reach out to take advantage of our free assessment. In this 1-on-1 meeting, we fully assess your current financial situation and give you feedback to help you get on the right path to retirement. Whether you’ve never talked to a financial advisor such as myself and don’t know where to start, or you’ve already built a plan you’d like to double-check, we’re here to help. Take advantage of your free assessment with Pure Financial Advisors today.
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IMPORTANT DISCLOSURES:
- Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC, a Registered Investment Advisor.
- Pure Financial Advisors LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.
- Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
- Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
- All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
- Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER® certification is by the CFP Board of Standards, Inc. To attain the right to use the CFP® mark, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. 30 hours of continuing education is required every 2 years to maintain the certification.
AIF® – The AIF® designation, administered by the Center for Fiduciary Studies fi360, certifies that the recipient has specialized knowledge of fiduciary standards of care and their application to the investment management process. To receive the AIF Designation, the individual must meet prerequisite criteria based on a combination of education, relevant industry experience, and/or ongoing professional development, complete a training program, successfully pass a comprehensive, closed-book final examination under the supervision of a proctor and agree to abide by the Code of Ethics and Conduct Standards. Six hours of continuing education is required annually to maintain the designation.
