🎓 Passive vs Active Investing

What is Passive Investing?

Passive investing is essentially playing the long game and using time to your advantage to make money in the stock market. People who believe in passive investing believe that the market is very efficient and is hard to exploit, they also have faith that the market will go up over time similarly to how it has in the past.

Passive investors have a multitude of strategies but the main strategy is called dollar-cost-averaging. The main idea of this strategy is to buy into a low-cost ETF or index fund with the same amount of cash every single month or paycheck. This makes investing super hands off and this is also one of the most successful strategies to ever exist. Dollar-cost-averaging also automatically buys more shares when the stock is low, therefore automatically fulfilling the buy-low side of the number one rule of the stock market. (buy-low, sell-high)

“The stock market is a device for transferring money from the impatient to the patient.” -Warren Buffet

Most people will end up following a passive investing strategy because it is easier, most experts don’t beat the market, and it works well especially if you get a consistent paycheck.

So why would people want to spend hours of their time every week to be an active trader when they could just invest passively? Lets discuss that in the next section.

What is Active Investing

Active investing is when an investor picks stocks that they think will outperform their competitors or the market. They do this with the goal of beating the S&P 500. One important note is that active investors are NOT traders. Traders buy and sell stocks in a much shorter timeframe than any type of investor. An active investor will buy a stock with the intention of holding it for a long time but instead of putting money in a low-cost ETF they instead pick individual stocks.

Active investors have hundreds if not thousands of different strategies but most will often pick stocks in a field they know a lot about. A good example of this would be someone who loves cars and knows a lot about different cars, this person would buy into car companies that they think have an advantage over other car companies. I personally would probably do a crap job trying to pick different car companies but because of my interest in finance and banking, I could maybe be good at picking different banks that I think will outperform other banks.

With the goal of beating the S&P 500 active investing is often considered much more risky than most forms of passive investing. The rewards for active investing can be greater but come with more risk and a huge sacrifice of your time and peace of mind.

So What is Better?

Personally, I do both, that is why I use multiple different brokerages. I can not tell you what will be better for you because that depends on what your goals are and if you are willing to sacrifice your time for possible greater rewards.

A 1% increase in returns on $100k is just $1,000 while if you are invested in the S&P 500 (getting an average of 10% return) you would just need an extra $10,000 invested to get an extra $1,000. Investors will sacrifice 10s of hours a week to just get a 1% increase on their investment when instead they could have just worked more and stressed less to get the same dollar return but with more equity.

“Investors should focus on getting more cash, not a higher return if they want to maximize investments”

I would say for the large majority of people passive investing is a much much better option. Most people will likely not beat the market and even if they do it is likely not worth their time. If you have a true passion for the stock market and a strong expertise in a certain industry an active strategy might be better for you.

What Strategy do I Use?

Like I said, I do both. I will say that I have significantly more invested passively but my returns are better with my active investing. My active strategy is…

1. I pick a handful of companies that I love, use, and think will do good in the future.

2. I do some research and study up on how profitable the company actually is. I also take into account how many assets and liabilities a company has.

3. I check online to see if other people have any important reasons why I should not invest. I do not let others sway my convictions but I do look to see if they bring anything up that I have not considered yet.

4. Lastly, I check to see if insiders and institutional investors are buying, selling, or holding the stock. This gives me a good idea about what other experts are thinking. Again I do not let this change my mind but I do take it into consideration.

Once I do all that and it still sounds like a good investment then I will start dollar-cost-averaging into a position. This process takes me a lot of time and is not particularly the most profitable strategy I have ever seen but it works for me. Out of the stocks I originally thought might do good in step one, I slowly filter them out until I have less than 10% left.

As for my passive investing strategy I selected a small group of ETFs that have goals that align with mine and I dollar-cost-average every time I get money. I personally prefer dividend ETFs for my passive strategy for a number of personal reasons.

The point I am trying to make is that everyone will invest differently and in different things depending on their own personal goals and objectives. My strategy is not for everyone, in fact I would recommend most people do NOT try my active strategy.

In the end, one is not better than the other but they do have very big pros and cons to consider. If you just want to grow wealth but don’t have any sort of passion for the stock market I would highly recommend passive investing. If you have a passion for the stock market and some special expertise in a field you might want to consider a more active investing strategy.

Brokers I use

• Webull Best for more active investing (get up to 75 free shares by depositing over $100)

• M1 Finance Best for more passive investing above $10,000 (get $75 if you invest more than $10,000)

• Charles Schwab Best for custodial accounts (get $100 by investing over $25,000)

• Fundrise Best for buying alternative investments such as real estate ($25 for signing up and making a $10 deposit)

Other tools

• Yahoo Finance Best for economic news

• Finviz Best for stock analysis and screening

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