In pursuit of this aim, sometimes we blend different elements of passive and active investment together. We do this where we think you will benefit from having complementary exposure to the more attractive characteristics of both. In the modern investment world, therefore, you really can have your cake and eat it.

For the average investor, passive investing might work better because of the lower fees and the fact that you don’t have to make decisions about which stocks to buy or sell. Multiple studies spanning decades have demonstrated that in the long run, passive investing beats active. Some examples of passive investments include exchange-traded funds that track an index like the S&P 500 (SP500) or Dow Jones Industrial Average (DJI) or mutual funds. In between these extremes lies a range of different strategies which use technology to make investment decisions using mathematical modelling rather than human judgements.

Active investing vs. passive investing: Which strategy should you choose?

The same cyclicality is present in other investment categories such as mid-caps, small-caps, and global/international equities. While bull markets can last quite some time, they’re not immune to occasional corrections (as measured by a loss of 10% or greater) to help keep them healthy. Like speed limits on highways, market corrections are a necessary evil in investing, but not one to be feared. They keep markets from becoming overinflated and prevent valuations from reaching heights that lead to damaging crashes.

Active investment management involves actively managing a portfolio of investments with the aim of achieving higher returns than a particular benchmark, such as the S&P 500 index. When bull markets inevitably turn, passive managers could be left holding stocks and sectors with poor fundamentals and inflated valuations. We’ve seen that the cyclical nature of active vs. passive investing definitely applies to the Morningstar Large Blend Category. The same holds true for other investment categories such as mid-caps, small-caps, and global/international equities. If a certain style or asset class is doing well, investors are quick to extol its virtues and pour their money into it.

Selection Strategies

Every fund manager chooses a benchmark that contains the type of investments their fund contains. When you’re thinking about active vs. passive investing, it’s important to realize that there are benefits to each. Active investing requires someone to actively manage a fund or account, while passive investing involves tracking a major index like the S&P 500 or another preset selection of stocks. It depends on your investment goals, risk tolerance, and time horizon. Active management can generate higher returns, but it also involves higher fees and risks.

Active investors frequently buy and sell stocks, bonds, and other securities to try to outperform the market. Active investors typically follow a specific investment strategy and make trades based on their research and analysis. The goal is to generate returns that are higher than the market average. There are various passive investment management strategies that investors can use, including index funds, exchange-traded funds (ETFs), and mutual funds. Understanding the difference between active and passive investment management can help you make informed investment decisions, reduce the risk of losing money, and improve your chances of achieving your investment goals. The fund company pays managers and analysts big money to try to beat the market.

What are the Pros and Cons of Active vs. Passive Investing?

By allowing investors to respond to ever-changing markets, active management empowers investors to maximize opportunity as conditions demand. But if you’re invested in an index fund, you could be exposed to significant downside due to single-sector performance. For example, during the collapse of the dot-com bubble in 2000, active management outperformed passive significantly, -0.41% to -9.44%. Much of the blame for passive’s underperformance during that period can be laid at the feet of a single sector.

HFMC, Lattice, Wellington Management, SIMNA, and SIMNA Ltd. are all SEC registered investment advisers. Hartford Funds refers to HFD, Lattice, and HFMC, which are not affiliated with any sub-adviser or ALPS. The funds and other products referred to on this Site may be offered and sold https://www.xcritical.com/ only to persons in the United States and its territories. FIGURE 2 shows that while overall there is no clear winner over the past 30 years, there has been a clear winner in active vs. passive performance for multiple and sustained periods, followed by a trading of positions.

Passive Investing

Investors in passive funds are paying for computer and software to move money, rather than a high-priced professional. So passive funds typically have lower expense ratios, or the annual cost to own a piece of the fund. Those lower costs are another factor in the better returns for passive investors. Choosing between active and passive investment management depends on individual investor goals, risk tolerance, and time horizon. To decide where you stand in regard to active vs. passive investing, it might help to get more experience by opening a brokerage account with SoFi Invest®. As a SoFi investor, you can actively trade stocks online, or invest in actively or passively managed ETFs.

It’s probably what you think of when you envision traders on Wall Street, though nowadays you can do it from the comfort of your smartphone using apps like Robinhood. As the name implies, passive funds don’t have human managers making decisions about buying and selling. When all goes well, active investing can deliver better performance over time.

Pros and cons of passive investing

Conversely, passive investors can hold actively managed funds, expecting that a good money manager can beat the market. On the other hand, passive investors are much more hands-off and invest in index funds and ETFs (rather than picking and choosing individual stocks) designed to track market indexes, such as the S&P 500. The goal of passive investing is to match the overall market’s performance rather than trying to beat https://www.xcritical.com/blog/active-vs-passive-investing-which-to-choose/ it. However, some actively managed mutual funds charge only a management fee, although that fee is still higher than the fees on passive funds. Many funds have reduced their fees in recent years to remain competitive, but they are still more expensive than passive funds. Thomson Reuters Lipper found the average expense ratio for an actively managed stock fund to be 1.4% but just 0.6% for the average passive fund.

• There seems to be no end to this debate, but there are factors that investors can consider — especially the difference in cost.
• Not all markets are the same, and different investment styles may be more or less effective in different regions, asset classes and circumstances.
• The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.
• Index funds are mutual funds or ETFs that aim to track the performance of a particular benchmark index, such as the S&P 500.
• Some specialize in picking individual stocks they think will outperform the market.