What Is The Difference Between Active And Passive Investing? [2021]

By: Frank Makrides

Updated on October 17, 2020

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Do you want an active roll in your investments or do you just want to sit back and have your money work hard for you in a completely automated way? That is the difference between active and passive investing. In this article, I will be sharing with you the pros and cons of both active and passive investing. The end goal will be for you to have enough information to start formulating an investment strategy that is right for you.

Active investing explained

Active Investing is the easiest of all the strategies to explain. In this one, you’re in the driver’s seat for all the decisions and are in full control of each investment. So, for example, if you plan on doing an active stock investment portfolio for equities or funds, you do all the necessary research, past performance, chart analysis, fundamentals, price to purchase targets and exit plans if any for every single investment. You should also develop tools and strategies on purchasing, amounts, allocations and more.

OK, a lot was said here in a short period of time, but to make a long story short is you take on all the decision making and risk when you start to build your portfolio of investments. You might decide to purchase individual stocks, bond funds, Real estate investment trusts, mutual funds and or ETFs. You might decide to go all-in on or more investments or you might decide to spread your bets and diversify as much as possible to reduce volatility and risk in your portfolio. Volatility is just another word for drastic swings in prices. This could be a lot of work for people or in some cases you can pick a long-term investment plan and strategy on your own and let it ride for a long-term period of performance, again you’re in the driver’s seat.

What is a stock index?

An index is a group of assets used to track the performance of a given industry, sector or overall market. An example of this is the Dow Jones or the Standard & Poor’s 500, otherwise known as the S&P 500. The S&P 500 is typically used as a monitor of the overall health of the US stock market. It is comprised of some of the top 500 publicly traded companies in the United States and is often considered the benchmark to brokers and fund managers on their trading performances.

What is an EFT and a Mutual Fund?

For more information in regards to Mutual Funds and ETFs, click on the link to the SEC guide.

An ETF or Exchange Traded Fund is often a low-cost investment vehicle that has an aggregate of companies’ stocks all lumped together into one fund for you to trade. They typically have low management costs due to their passive nature. Mutual Funds on the other hand are actively managed and tend to have higher fees.

How to buy stocks?

SECURITIES INVESTOR PROTECTION CORPORATION (SIPC) protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. Click here to learn more information.

Today it is easier and cheaper than ever to purchase stocks. There are so many platforms and options available today that allow you to purchase securities like never before. Some of them offer completely $0 cost trades, trading from your mobile phone, off-hours trading, vast funds that you can select from and world-class portfolio management solutions. Some of these platforms over free bonus cash or stock sign up when you either open and or initially fund an account. That’s free money to get your portfolio off the ground. I will have links in the description section below to a few recommended platforms.

Luckily I’ve taken the guesswork out of it and my favorite pick for an active investment brokerage platform is Webull. With Webull you get completely commission-free trades and if you use the link below you even get a sign-up bonus on a new account if you open it today and fund it with $100.

#1 Rated Investment Brokerage Platform

Today it is easier and cheaper than ever to purchase stocks. Some of them offer completely $0 cost trades and you can do this straight from your mobile phone. My personal recommendation is Webull. It offers all the above plus some of the most amazing stock and fund information at your fingertips. The platform is free so download it today and give it try.

Try Webull

Stock market investing research tools

The two methods to evaluate individual companies and funds are called qualitative and quantitative analysis. Usually, the best results are derived from a combination of the two methods. Qualitative is when you almost listen to your gut as per se, or you go with non-numbers-based information to help make a decision. Looking at a companies historical track record, their overall ethics and who their leadership is are all examples of qualitative analysis. Quantitative analysis again focuses on the numbers. Examples of quantitative analysis include the company’s balance sheet, sales, profits, stock or fund chart analysis just to name a few. Most investors weigh the quantitative metrics more in their investment decision process than the qualitative ones. There are two amazing free platforms that provide some of the best qualitative and quantitative data out there and the best part of all they’re free! Atom for the first time provides you institutional-quality resources that were once only available to Wall Street professionals. Tradingview is by far the best free charting and data analysis tool in the industry. I use them both and they are critical in my investment decision-making process.

#1 Rated Investment Research Platform

Link your existing investment account(s) for free and have access to some of the most powerful stock and fund research in the world. You will have access to the institutional-quality resources that were once only available to Wall Street professionals. If you want to make smarter, data-driven investment decisions then you have to try Atom today.

Try Atom

#1 Rated Charting Platform

If you are interested or currently conduct any type of chart analysis then you have to use TradingView. I have used both their free and premium tiers. The charting options are pretty much endless. I love using TradingView along side Atom to help provide me the detailed insights and intelligent decision making to plan out my investment portfolio.

Try TradingView

Passive investing explained

Passive investments are investments where once they’re setup, they should provide you an expected projected of returns with less of your time invested in the day-to-day portfolio management process. For the most part, you have people or systems managing your investments and they provide you a given projected return based on your input criteria.

Passive investing with a financial advisor

The most important thing when choosing a financial advisor is picking one who is a fiduciary. This person will invest your money based on an agreed-upon plan built together through consultation. This is usually the most expensive method of passive investing because the fees are the highest. If you have a great financial advisor, someone you can trust, it could though yield some potentially good returns, justifying the fees they charge. Even better today there are even lower-cost options that provide a hybrid between managed and Robo Advisor in one, so you get the best of both worlds.

Our #1 rated managed account in the industry is Personal Capital. They also offer some of the best industry tools and features to help you project your portfolio’s potential, calculate your overall net worth and so much more. They even offer a free tier without even needing to fund your account. If you want to invest with Personal Capital, they do have a $100,000 minimum to open an account. Either way, free account with amazing tools or if you’re ready to invest, you should try Personal Capital today. I have a link to them below.

#1 Rated For Net Worth Analysis & Managed Investments

Hands down, Personal Capital is the best platform for you to calculate your net worth. Personal Capital also fills in all the gaps I tend to find with Mint as well. They also have a very robust portfolio management offering that is a hybrid of a managed and Robo advisor. The best part of all is that their net worth and portfolio projection tools are completely free to use.

Try Personal Capital

For more information in regards to traditional investment advisors, click the link to the SEC’s website.

Automated passive investing with robo advisors

Another more popular form of passive investing today is Robo advisors. This is a much lower cost option than using a traditional financial advisor. With a Robo advisor, you’re engaging with a software program within an investment account. The software program would ask you a series of questions from your age, income, risk tolerance (high, medium, low), your overall goals of the investment, and the duration of the investment plan you want to put forth. Then the computer automatically builds a portfolio of investments for you. Some Robo investors will actually continuously adjust your investment based on any changes you either enter into the algorithm, the performance of the portfolio and or the markets.

Our #1 rated Robo advisor investment platform is M1 Finance. It’s free to open accounts and you can start investing with as little as $100. Check out M1 Finance below.

#1 Rated Robo Advisor & Dynamic Portfolio Rebalancing

The M1 Finance investment, retirement account and technology are simply amazing. They even offer dynamic re-balancing, full customization and even some pre-built portfolio options called expert pies. M1 is a strong recommendation for your automated investment and retirement needs. Try them today with only as little as $100 to start investing.

Try M1 Finance

If you’re looking for a completely automated Robo Advisor, for an IRA retirement investment account only, then our #1 rated automated retirement Robo Advisor platform choice is Acorns. Learn more about Acorns below.

#1 Rated For Automated Funding Of Investments

Automate your retirement investing through your spare change and intelligent Robo advisor services. Setting up an account takes less than 5 minutes. They now offer no-fee checking as well. If you want to put your spare change to work to help grow that retirement nest egg, there is no better product on the market than Acorns.

Try Acorns

For more information in regards to Robo advisors, click the link to the SEC’s website.

Summary

If you want to devote the time to research stocks and funds then you might be more interested in active investing. The vast majority of people will choose the passive investing option. This allows them to have more time to do other things in their life other than investment research.

At the end of the day, it is up to you. I personally think having some level of understanding of where your money is going is important. You need to monitor your portfolio’s health no matter which option you choose. You should always have a good understanding of how your investments are performing and their performance in line with your overall financial plan and goals.

What are your thoughts in regards to active vs passive investing? Do you have any strategies or ideas you would like to share, if so I would like to hear about them in the comments section below?

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Frank Makrides

Is a former financial technology industry executive, licensed realtor, real estate investor, an award-winning speaker, has been published, holds multiple patents and is passionate about all things personal finance and entrepreneurship. He is also a proud husband and father of 2 amazing children.