Active vs Passive investing – what does it mean?

You don’t have to be an expert in investing to become an investor.

Most investors are not like the Warren Buffett of this world, with millions to invest, expert knowledge of the machinations of markets in general and intimate understanding of individual businesses.

In fact, you can become a successful investor with just a basic understanding of the stock market – and becoming a passive, rather than an active investor.

At Continuum we are explaining the difference.

What do we mean?

If you have invested in the past, and ever wondered about the different ways to make your money work for you, you have likely come across the terms active and passive investing. 

We will explore the key differences, and making sure that you understand these approaches to ensure you are making informed decisions about your money. 

Active funds

With an active fund, the fund manager picks specific stocks to fulfil the objective of the fund. They will constantly update the stocks the fund holds to take advantage of opportunities and dispose of holdings that are underperforming. 

Active investing is an investment strategy where a fund manager actively buys and sells assets in the hope of making profits and outperforming a benchmark or index.

If the manager’s decisions are correct, an actively managed fund should out-perform the market. But it is a highly skilled fund manager who will make the appropriate decision the majority of the time.

Passive funds

With a passive fund, the manager simply creates a basket of stocks, and unless something drastic happens, will leave them to grow.

So, for example, a passive fund might be set up to track the performance of the FTSE 100. It will do this simply by investing in every FTSE 100 share. When a share drops out of the FTSE 100, the fund would automatically sell it and buy whatever stock replaced it.

Passive investing involves investors’ money being used to buy a broad spread of investments in line with a particular index; the weighting of each holding is automatically adjusted to follow the index over time.

A passive fund is called an index fund if it tracks a stock market index, or a tracker fund if it’s following another metric – and there are passive funds for most indexes and sectors.

So, which is suitable for you?

This depends on several things. 

The choice between active and passive investing ultimately boils down to your unique circumstances, preferences, and financial goals – which are discussed with your financial adviser. 

It’s about finding the approach that aligns with your comfort level, time commitment, and desired level of involvement in your investments. 

Take a moment to reflect on your financial objectives, risk tolerance, and your investment time horizon.

Whether you lean towards the hands-on strategy of active investing or prefer the hands-off simplicity of passive investing, the key is to make choices that resonate with your individual needs. 

Investments can be complicated and having an expert to call on who will look to ensure that the investments you make are appropriate for your needs. can give you peace of mind.

Call us at Continuum for the expertise you need to make your investments work harder for you.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

The value of investments can fall as well as rise and you may get back less than you invested.

When investing, your capital is at risk.

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