Active Investing Strategy Examples:
Taking a proactive stance with your investing decisions offers a variety of advantages including:
- Active investing is correlated with a stronger rate of returns.
- With active investing, your investments can benefit your finances significantly if you make wise choices. Unlike passive investing, your payoff is not limited to how a certain index performs. Ideally, when the market rises, active investors will see a larger profit from their efforts. And when the index falls, it wont be as costly for the active players. Instead, their investment choices may increase gains with the markets success and preserve their funds more so than others who lose with the market when it dips.
More flexibility
Active investors are not limited to the restraints of a certain market. With expectations for future financial gains, they can make decisions that work best for them and forego those that may disappoint in comparison.
There’s no better way than active investing to pursue what you want while avoiding mistakes others might have made before
Diversified portfolio
Active investors are able to diversify their portfolios in many more ways than passive investors. Active investing is all about taking risks and trying new things, which can lead to a variety of investments like individual stocks, commodities, or even auction-rate securities. With such an array of options available for investment strategies you may be better equipped with the tools necessary for reaching your financial goals!
Pros & Cons Of Active Investing
Active investing has both benefits and drawbacks you need to keep in mind.
Pros
Cons
Investing In Rental Property
Some people choose to invest in rental property as part of their passive investment strategy. However, if you decide to invest in rental property, you must find a property management company you can rely on.
An excellent property manager maintains the home and deals with tenants. Of course, this could result in your losing a portion of your passive income. On the other hand, a good property manager will ultimately save you expenses and add to your profit.
However, if you dont have the necessary capital to invest in a second property or additional mortgage, investing in rental property may not be the best decision for you and your family.
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Active Vs Passive Investing Strategies
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Investing money in the equity markets can be a risky prospect compared to simply saving it in a traditional bank account, which may explain why a significant number of Americans apparently avoid this undertaking. According to surveys conducted over a number of years by the Gallup Organization, slightly more than half of the U.S. is currently contributing money to the stock market in some way, either through purchasing an individual stock or by participating in a self-directed retirement fund like a 401 or IRA.
Since Gallup began polling Americans on stock market participation in 1998, however, this trend has shifted somewhat. In 2002, for example, more than two-thirds of respondents said they were invested in the stock market somehow. When it comes to managing investments on their own, a majority said they were comfortable with the idea of choosing investments themselves, although 23 percent said they would not be.
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What Is Passive Investing
Passive investing, which is also sometimes referred to as passive management, is best categorized as a buy and hold philosophy. At its core, its a straightforward investment approach that looks to avoid frequent buying and selling, and seeks to invest in securities likely to grow over the long term. Consequently, passive investors are betting on steady market increases rather than trying to beat the market. This is in direct opposition to active management, which call for frequent transactions in an effort to achieve above-average returns.
Passive portfolios typically include a few different types of investments. Principal among these are index funds, mutual funds and exchange-traded funds . Rather than select single securities like stocks or bonds, these funds seek to diversify across a number of individual holdings. As an example, a fund centered around stocks might invest in multiple equities in specific markets, like large-cap U.S. stocks or the international market. Heres a deeper breakdown of these investments:
Line Up The Needed Resources
Once you’ve determined what sorts of strategies you’re going to use to generate passive income, it’s time to get to work. And by work, what’s really meant is finding a few spare minutes outside your full-time job to ensure that your bank accounts and portfolio are set up properly. Thankfully, once you have the money, the internet makes it easy to automate your investment or savings strategies, automatically sending monthly or even weekly payments to wherever you’re investing in the market. Even setting up an extra $100 to invest each month can wind up providing you with a lot of extra income once you can start withdrawing your stock dividends.
Of course, if you’re investing in a rental home, you’ll need to find a property management company you can rely on to maintain the home and deal with tenants. While this could result in you losing a higher portion of your passive income since you have to pay the manager a cut of your profits, when you consider that it’s truly a passive activity generating some extra income each month, it’s well worth the investment to find a good company to handle your rental property for you.
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The Result Of Passive Investment
Of course the most obvious result will be that you will notice your investment value growing over time. After a while you will realize that besides your monthly savings, your investment will provide extra returns as well via distributions. You should also add these returns to your investment and slowly but steadily the compounding effect will start working.
After a couple of years you will notice that the returns of your investment will even exceed the amount you are saving from your salary. You have made a money making machine and the limit is the sky!
As an additional result you will also gain something that cannot be measured by money . Im talking about financial awareness which is an extremely valuable asset in life. Being financially aware is a way of thinking and a way of lifestyle. It does not depend on your financial situation, but does have effect on your future financial situation. A poor person with financial awareness can increase his wealth, while a rich one without such ability might lose everything.
Earned $400 Million, Went Bankrupt
Active Investment Income Strategies
The following is a list of âactiveâ investment income strategies. Over the years, many have begun to associate some of the types of investments as âpassiveâ in nature. I can assure you they are not. If someone is selecting individual securities of any type and creating a portfolio of holdings, this is the definition of active management and investing. Some actually advocate devoting 100% of your retirement portfolio toward certain classes of investments, which substantially increases risk by reducing diversification. Letâs review the sub categories of investments.
High-Yield Dividend Stocks
High-yield dividend stocks are an attractive choice for many investors and retirees alike. High dividend stocks offer an increased income payments to shareholders due to an increased yield. Nonetheless, donât be fooled, the higher the yield, the higher the risk. Before you opt for a portfolio full of dividend stocks, you should consider the risks. High dividend stocks are a category unto themselves. They tend to fall in and out of favor, like all other categories of stocks. Relying solely on high yield dividend stocks can leave your portfolio under-diversified.
Bonds
REITs
MLPs
Taking Profits Winners
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Disadvantages Of Passive Investing
- Its not flashy. If youre looking for the excitement that comes from seeing quick skyrocketing returns from a single stock, passive investing pales in comparison.
- No exit strategy in severe bear markets. Because its built for the long term, passive investing doesnt have an off ramp during severe market downturns, Stivers cautions. While historically the market has recovered from every correction, theres no guarantee that itll do so quickly. This is part of why its important to regularly revise your asset allocation over longer period. This way, you can make your portfolio more conservative as you near the end of your investing timeline and have less time to recover from a market dip.
Importance Of Passive Investing
- The passive investing is having great importance for the investors who are willing to invest in the stock for a longer period of time.
- It reduces the cost of trading in the stock market.
- The passive investing strategies also saves taxes because when less transactions are done then the implication of cost is also less and therefore the taxes are also less compared to the other active investing strategies.
- The passive investment strategy also maximizes return by reducing the overall cost of the trading.
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Find An Investment Vehicle That Interests You
There are a few different ways to go about setting up your passive income stream, and it’s important that you find the way of generating a passive income that speaks to you. For example, some people may choose to invest in a rental property and pay somebody else to manage the renters for them, taking a cut of the proceeds. While rental income is a great option for some investors, if you don’t have the necessary money to invest in a second mortgage, this may not be the best decision for you and your family.
On the other hand, one of the easiest paths to passive income that doesn’t involve online income is taking advantage of compound interest. Some people will choose to set up a secondary investment account, such as a Roth IRA in order to maximize their contributions by paying taxes as you contribute to your investment portfolio instead of paying taxes on the money when you withdraw it. Especially if you’re currently at a lower tax bracket and expect to make more money in the future, maximizing your Roth IRA now can be a simple and effective way to leave your money in an account and watch it grow exponentially over the next ten or twenty years.
Mutual Funds: Active Vs Passive Management
When a fund is actively managed, it employs a professional portfolio manager, or team of managers, to decide which underlying investments to choose for its portfolio. In fact, one reason you might choose a specific fund is to benefit from the expertise of its professional managers. A successful fund manager has the experience, the knowledge, and the time to seek and track investments key attributes that you may lack.
The goal of an active fund manager is to beat the market to get better returns by choosing investments he or she believes to be top-performing selections. While there is a range of ways to measure market performance, each fund is measured against the appropriate market index, or benchmark, based on its stated investment strategy and the types of investments it makes.
In any given year, most actively managed funds do not beat the market. In fact, studies show that very few actively managed funds provide stronger-than-benchmark returns over long periods of time, including those with impressive short term performance records. That’s why many individuals invest in funds that don’t try to beat the market at all. These are passively managed funds, otherwise known as index funds.
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Key Pillars That This Strategy Is Based On Which Will Help Investors Discover Different Aspects Of A Passive Investment Strategy And Allow Them To Adopt It For Investment Portfolio Enhancement
Passive investing is an already established business the world over. Most developed nations have seen passive funds do well and in some cases even better than active funds. One of the primary reasons why an increasing number of investors are inclining towards a passive investment strategy is the lower costs. In India, passive investing is yet to pick up pace and is in a very nascent stage.
Passive funds that follow the Nifty index are known to have done comparatively well since the index has given a return of over 18% CAGR in the past 22 years.
The question that new investors often ask is how does a passive investment strategy work?
To address this question, we have put together 7 key pillars that this strategy is based on. This will help investors discover different aspects of a passive investment strategy and allow them to adopt it for investment portfolio enhancement.
1. Easy to Monitor
Passive investment requires a long-term commitment and the investment corpus is benchmarked to an index. The idea is to replicate the performance of an index by investing in the same securities as the index and in the same proportion as the index. Thus, the portfolio remains relatively unchanged for the entire investment duration. This makes a passive investment strategy easier to monitor, as it doesnt require portfolio modifications as per market movements.
2. Buy & Hold Strategy
3. Mirrors an index in composition and returns
4. Generates superior returns over the medium to long term
What Are The Benefits Of An Active Investment Strategy
The potential benefits of an active investment strategy are:
- A chance at bigger rewards. An actively managed fund or portfolio has the potential to beat index returns. A quality investment strategy can be an important factor in capturing greater risk-adjusted returns relative to the market.
- Flexibility. Active managers can buy stocks that may be undervalued and underappreciated in the general market. They can quickly divest themselves of underperforming stocks when the risks become too high. They can choose not to invest during certain periods and wait for good opportunities to buy.
- Tax management. Although frequent buying and selling may trigger more capital gains and taxes, some strategies can help offset taxes for big winners.
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Considering Active Vs Passive Investment Management
It doesn’t have to be an either/or decision.
When building or adjusting your investment strategy, do you want active management, passive management, or a combination of both? It’s important to understand fully how each approach works, and the differences between them.
Active management: Benchmark outperformance is the targetWith an actively managed fund, a fund manager tries to outperform a particular benchmark for stockssuch as the S& P 500, or for bonds, the Bloomberg U.S. Aggregate Bond Index. How do active managers try to beat the index? The answer varies from manager to manager, but common ways include taking more risk than the benchmark, or owning more of a particular security or sector within the benchmark. They can even decide to own securities that are not in the underlying benchmark.
Passive management: Matching benchmark performance is the goalWith a passively managed fund, the fund is designed to match the performance of an underlying benchmark, like S& P 500 or Bloomberg Aggregate Bond. Passive fund managers can own all the stocks in the index to match its performance. They can also aim to mirror the performance of the index by owing a smaller subset of the underlying securities.
“Regardless of your situation, remember that deciding which type of fund to buy doesn’t need to be an either/or proposition. Many investors use a mix of index funds and actively managed funds in their portfolios.”
