Passive vs Active Investing
This recent market volatility has many investors wondering if now is a good time to change up their investments. It’s not easy to watch your account value creep lower and lower as uncertainty in the world grows. You may feel the need to do something, anything to make the pain of losing money go away.
When it comes to investing, there are 2 types of investors, passive and active. Passive investors are focused on the long-term. Their strategy is to buy and hold their investments even when markets are highly turbulent. They avoid jumping in and out of the market. They are looking to perform exactly as the market does.
Active investors like a more hands-on approach. With this strategy, they are looking to outperform the market. Active investors switch up their investments often to try and stay ahead of the market. I’m sure we all have someone in our lives that talk about a hot new investment that you should buy. Trying to chase market fades is an example of an active investor.
Many people believe that if they just had time to focus on investing, they could do better than the market. They hear about others making loads of money all from the comfort of their house. They think, how hard can that be? What your friends might be telling you is how much money they have lost trying to chase higher returns.
Trying to bet the market is extremely hard, almost impossible over long periods of time. There are investment managers who are paid millions of dollars to just beat the market. That is their sole focus. But yet as you can see in the chart below, a staggering amount cannot beat their benchmarks.
Over a 1 year timeframe, about 65% fail to beat the benchmark. But as time goes on less and less are able to consistently beat the benchmark. Over a 20-year timeframe, only 6% of professional fund managers outperform the market.
So as an individual without the education that these fund managers have, how can we expect to beat the market. The answer is, your not! The best advice is not to waste your time trying to chase returns. Passive investing might seem boring but will very likely lead you to much higher returns over the long haul.
While it’s typically best to leave your investments alone there are times when you should consider making changes to your portfolio. You may consider a change when your goals change. Maybe you have decided to retire earlier than you initially thought. Thus the need to put your money in lower-risk investments. Or on the other hand, you may need to make a change if you decide to retire later.
Next time you think about making a change to your portfolio, remember that most of the time it’s probably not the best move. Even when we know we should stay put, it can still be tough when markets are dropping. As Warren Buffet once said, “Investing is simple, but not easy.”
Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at email@example.com.