Every participant who just entered the stock market or some other financial market must ask themselves is, “how much time I want to spend on investing?” Only then anyone can get the idea about the types of investments and portfolio management. And when it comes to that there is no argument more disputable than active versus passive equity investment management. If you are a beginner then you must have seen and met many investors in the stock market. It is because each trader/investor has its own trading style to invest in the market.
Investors trading style and nature allow them to invest differently. Thus, there are two common methods to invest in: Active and Passive.
Active Investment refers to picking individual stocks and bonds or buying mutual funds that are actively managed by professionals. It is a portfolio management strategy used by active investors to beat the market.
On the other hand, the passive investment refers to investing way to match the market’s performance via funds that track indexes. One can invest in a way he/she sees fit. But, sometimes, the investors like to spend time on researching individual stocks like active investors and sometimes they like to do the opposite and don’t want to stress about the volatility and investment risks. This dual mentality is very common among young investors, rookie investors, and investors who want to have as much as return possible.
It looks like impossible, or is it?
Well, what if we say that “the two methods can work together in a way that it will deliver the best of both while compensating the downsides of each.”
This is one of the quite handy stock market tips we would like to share with you.
Most of you are aware of benefits associated with active and passive equity investment management strategies but we are sure not all of you are aware of disadvantages of each. It would be important to have the information on distinct disadvantages of active and passive portfolio management. Only then you can use the dual strategy to approach both at once.
What you have to overcome?
In the active investing, there are certain disadvantages like company-specific risk, higher expenses, and management fees. Even the passive investing has some distinct disadvantages like performance limitations and overall market risk.
Overall, we can say that an investor can be proficient in both investing if he/she possesses the skills such as keeping up with the markets, sectors, and companies; understanding of balance sheet; and the skills needed to evaluate management teams, companies, and market positions etc.
So, if you are capable of evaluating companies, it can help you in creating an active/passive equity strategy in order to use active equity investments in companies after obtaining information on – and passively invest in those.
To use this Dual strategy, one can consider establishing an active portfolio in a non-tax-deferred account of domestic stocks. When looking for domestic stocks, it would be wise to limit the active session of the portfolio to large-cap and mid-cap instead of small-cap.
Since small-cap companies are difficult to understand, one can evaluate the balance sheets and management teams efficiently.
In the end, to properly diversify the portfolio, one can add some small-cap domestic ETFs with performance histories uncorrelated with those large-caps and mid-caps. Such kind of portfolio can harness the benefits of active and passive portfolio management’s advantages by using each other to avoid risks posed by other.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.