Active or Passive Investing: Which is Better?
Investing has changed people’s lives. It is is now the most lucrative business out there, be it on real estate, stock exchange, business franchises, entrepreneurial start-ups, cryptocurrencies, NFTs and some might even consider MLMs.
Covid-19 has changed many business landscapes, bringing forward technology implementation and adoption. About two years ago, working form home is something foreign and perhaps only applicable if the Company you work for is not of a traditional organisational style. Fast forward today, working from home is an experience almost everyone had had and it is no longer foreign. Some prefer it more than others, while some would still love the interactive part of working from office.
Graduates see the pandemic economy as a curse as many young workers were hit hard and faced with uncertainties and unemployment. This in turn has triggered a start-up boom and lead more young people to trading and investing.
Active investing has always been favoured by fund managers and traders, because they portray a chance of bigger reward, beating the market and achieving a higher return than the standard benchmark. During a bear market, active investing is more commonly preferred as one can control the risk and provide downside protection, using stop losses to secure their capitals.
While the former might be true, active investing often comes at a higher cost. Substantially higher fees do not necessarily translate to higher returns.
Passive investing gets its popularity from Warren Buffett. Just by holding $1,000 invested in the S&P 500 ten years ago would return a gain of more than 200%. This buy-and-hold mentality is what attracts many people at first due to the simplicity. Generally, due to the long holding period, passive investing has better tax treatments such as Australia’s 50% Capital Gains Tax discount.
While it is easier said than done, most investors cannot bear to just let their money sit and do nothing. Finfluencers (aka financial influencers on social media) have blossomed as they show easy it is to make $100 overnight, buy a property without any cash or learn essential day trading skills under 30 minutes. When you see gains of 20% in a week, you would start to think about passive investing no longer being relevant.
What is the takeaway really? I would say a mixture of both. It is not really an either/or situation, and depending on your personal circumstances, you could really use both to your advantage.
