Investors in the stock market are usually divided into active and passive. Here we are not talking about traders who make a lot of speculation during the trading day.
Active investing
This approach assumes that someone must constantly manage your portfolio of securities. This could be you or an investment manager from a brokerage company, who will gladly do this for you for a fee. Asset management involves buying and selling stocks, rebalancing a portfolio, and tracking new opportunities.
A more sensitive response to market sentiment and forecasting the behavior of certain companies depending on external events can bring very tangible benefits to the investor. Of course, this requires a fairly deep knowledge of the markets, experience and professional flair.
However, none of your portfolio manager’s skills should give you hope, as failures are bound to happen, it’s only a matter of time. As always, higher reward comes with higher risk. In the long run, active investing will in most cases lose out in return on passive investing or be on par with it.
Passive investing
This approach is more conservative and, frankly, more reliable. It incorporates a “buy and hold” philosophy. Although, of course, the reliability and profitability of investments depends on how competently the initial portfolio is composed.
In the past, a private investor had to buy individual shares of leading companies that are included in major stock indexes, and periodically review his portfolio, changing the shares of these companies in it. Thus, some active actions were still required.
Today, we just regularly buy ETFs and that’s it. Moreover, some brokers can even automate this process. That is, you can not look into your brokerage account at all for months or even years and not react in any way to events that affect the market, whether they are positive or negative (in fact, this is the ideal behavior of an investor). This is a truly passive investment, which very often outperforms active investors in terms of profitability, not to mention traders.
Summarizing
Actively managing your investments is a professional occupation for people with strong nerves that not everyone can withstand. Yes, it can bring high profits, such cases are known, but they are very few.
Conservative long-term investors are still at the top, staying calm and earning higher returns as a result. Instead of wasting time managing your portfolio, wouldn’t it be better to parallel develop your business while your ETFs slowly rise in value?