Active vs. Passive Investing: It's Time to Understand the Difference Once and For All

Even with the onset of COVID-19, major online brokers saw new accounts grow as much as 170 percent in the first quarter of 2020.¹ For investors, whether working with an advisor or taking a DIY approach, it’s important to understand the fundamental differences between two common investing practices - active and passive. At Innovative Retirement, LLC we believe in taking a hybrid approach to the active/passive debate.  We feel that both strategies make sense at different times for different reasons.  

What Is Passive Investing?

By practicing passive investing, you aim to maximize your returns while minimizing the amount of buying and selling that you do. With this strategy, investors may buy and hold their stocks and bonds in passive "index funds."  

These funds rise and fall to match the performance of certain indexes. Because of this, passive investments are not meant to beat or outperform the market, but rather match the market’s performance.

At Innovative Retirement, we feel that passive investments can give you broad market exposure at a reasonable cost.  These strategies generally tend to cost less than actively managed strategies, because all they are designed to do is match the index performance.  The goal is to capture all of the upside and all of the downside.  We tend to lean on passive investment strategies when there is a favorable economic environment and typically only use them in more developed markets within larger size (more well known) companies.

What Is Active Investing?

Some investors may think of active investing as attempting to “beat the market” and outperform a specific standard benchmark. While actively managed funds to have the goal of outperforming the market, that only tells part of the story as to why you may want to own actively managed funds. 

At Innovative Retirement, we look towards active management to not only match/outperform on the upside, but probably more importantly to lose less on the downside when we run into bear markets.  Typically, the actively managed fund manager has more flexibility within the fund as to what he/she can do.  They can buy certain sectors and sell others, they can be overweight sectors/companies, or can completely sell out of a given sector/company.  A passive fund typically does not have this flexibility and is most often required to match whatever index it is following.

Which Is Right For Me?

During the coronavirus pandemic, our clients in both New Braunfels, TX and La Crosse, WI benefited from a dual approach to owning both passive and active investments.  We feel that too many people pick/choose one strategy and ignore the other.  We believe that the strategies actually work better together than they do on their own.  

Some investors may find a mix of both active and passive investments the right move for diversifying their portfolio. With the lower fees passive investments tend to incur, it may be an appealing option for investors who don’t have the time or desire to actively manage their investments or can’t hire someone to do it for them.

How you choose to invest will likely come down to your priorities, desired personal involvement and long-term goals. If you’re unsure what direction to take your investments, an investment advisor can help explain your options and provide further guidance.  Please feel free to reach out to one of our offices and we would be happy to have a conversation with you without any cost or obligation.