Passive vs Active Investing

When it comes to investing, you need to decide which type of game you want to play - active or passive?


Do you want to study income statements of companies and pick each and every stock you are going to trade? 


Do you want some professionals to actually do that and try to "beat" the market?


Are you just happy to get the average market returns? 


Each of us can answer this in a different way. If you are convinced you know which companies will be successful in the future, then selecting your own portfolio of stocks might serve you best. As an ordinary guy, I dont have that belief for myself - and I suspect you dont have it either (if you do, what are you doing here?).  


If - on the other hand - you are really not an expert and are not willing to dedicate time and effort to this topic, you should consider option 2 and 3. 


The key difference is that in option 2 you will pay someone else to do the hard work - usually via Active Mutual funds. These funds have professional stock pickers which will try to outperform the underlying index (e.g. the Americal S&P 500). Since they require manpower, they tend to be expensive (compared to Passive Mutual funds or Index funds - keep reading, we will get there). 

The main problem with this route is that having professionals pick the stocks to invest in is by far not a guarantee for above market returns. Actually quite the opposite! According to SPIVA, almost 85% of Active Mutual funds underperformed the S&P Europe 350 in the last 10 years. 

The hit you get is actually double: first of all, you trail behind the normal Index and second, you have paid quite a decent amount of money for that (poor) performance!


The last option is to simply "go with the flow" and invest in Passive Mutual funds or Index funds. Here the goal is not to beat the market (or underlying Index) but just to match it. To reach this goal, you can keep costs very low - lower than in option 2 - and still achieve a pretty decent return on investment. 

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