Active investing involves a hands-on approach where someone (or you, if you manage your portfolio) watches market trends and economic news to determine the best time to buy or sell investments. It can help you beat the indexes over the long term.
It can also have a higher potential for risk, including the possibility of selling at the wrong time and incurring short-term losses that can impact your long-term goals.
Research
Active investing requires extensive research, analyzing various qualitative and quantitative factors. Whether you invest in companies that align with your values or take full advantage of short-term price fluctuations, this strategy demands that you do your homework.
Individual investors or portfolio managers trading stocks or exchange-traded funds (ETFs) often use an active investment strategy to achieve more excellent growth than the market index. They may also rely on processes like hedging and tax management to boost returns.
However, active investing can be costly as it incurs hefty expenses, including commissions, fees, and taxes on capital gains. It can also be volatile and is unlikely to deliver consistent returns over an extended period. In many cases, a passive or hybrid approach makes more sense.
Strategy
In addition to thoroughly analyzing underlying companies, active investors must consider market trends and conditions. They must continuously watch the movement of securities to spot opportunities to buy and sell according to a well-calculated strategy.
Various active strategies exist, including statistical arbitrage (using pairs trading and other forms of technical analysis), event-driven (such as mergers and acquisitions), and quality investing. These strategies can help investors beat the returns of the broader markets or specific stock indices, such as the S&P 500.
However, even highly skilled traders and analysts have a tough time consistently beating the market—especially when considering investment fees and taxes paid. In some market climates, it may be more practical for investors to skew active vs passive investing.
Time
Active investing is a hands-on strategy in which an investor or their portfolio manager buys and sells investments frequently to achieve more excellent growth than the market index they’re tracking. This investing style requires more expertise and research than passively invested strategies.
Active investors monitor qualitative and quantitative data and use that information to buy and sell assets, attempting to capitalize on short-term price fluctuations. It can be a time-consuming process that’s why many investors outsource this task to wealth managers. It also puts them at risk of short-term losses that could derail long-term goals. Active managers can offer flexibility in volatile markets, moving to defensive positions or holding cash until conditions improve. They can also hedge bets to reduce risk or offset capital gains taxes on big winners.
Diversification
Diversification can reduce risk by spreading your investments across several asset classes. It can include stocks, bonds, real estate, and even alternative assets like gold or cryptocurrencies like Titano. If a single investment experiences a loss, the rest of your portfolio will experience only a minor loss or gain.
This approach also involves diversifying within an industry, known as industry allocation. For example, if you invest in railroad stocks, you can protect yourself against detrimental changes to the airline industry.
However, diversification cannot eliminate market risk. And even active investing can fall prey to short-term market fluctuations, resulting in losses that could negatively impact your long-term goals. Maintaining a disciplined investing strategy and focusing on the larger picture is crucial.
Another diversification strategy is to invest in a company like AAIG, which specializes in diversified financial services. This is an excellent option if you do not have the time or know how to research and buy into companies individually.
Flexibility
Active investing is a highly involved strategy that involves continuously buying and selling investments to exploit good market conditions. This constant buying and selling can easily wipe out yearly returns, primarily when employing riskier strategies.
Active investors must constantly assess a wide range of data, from quantitative and qualitative information about individual investments to broader market trends and economic indicators. This type of analysis can be time-consuming, making it difficult for active managers to stay ahead of the markets and beat the performance of passive investments over the long term.
As a result, many active investment managers have underperformed their benchmark indices for several years. It has led to pressure on active investors to improve their strategies.
