What Type of Investor Are You? (Active vs Passive Investing)
No two investors are the same. Everyone has their own objectives, motivations and ideas of what they’d like to invest in. That said, there are patterns of investing and this means investors usually fit into one of two categories – active vs passive investing.
If you can work out what type of investor you are, you’ll understand how you can tailor future investments to suit your personal investment strategy. It all depends on the amount of day-to-day work you want to put into your investment.
In this article, we explore active vs passive investing and ask the question, what type of investor are you?
What is Active Investing?
As the term suggests, active investing is all about taking the reins and running your investment yourself. In the stock market, this would mean adopting the role of portfolio manager and attempting to beat the stock market’s average returns with short-term price fluctuations. In buy-to-let terms? It means investing in a property and handling the ‘day-to-day’ yourself, whether that’s finding tenants; completing maintenance tasks or marketing the property.
Active management is typically a full-time job and can require a higher level of expertise than required in passive investing. Active investors will need to understand when to pivot out of a stock or when to expand their portfolio as it’ll be down to them. Similarly, ‘active landlords’ will need to perform their own research, find properties and understand how to build the foundations of a portfolio.
Active investors will tend to:
- Select their own investments
- Want full control over their investment assets
- Have a deeper level of knowledge around the market
- Want to turn investing into their full-time job
Your experience level, knowledge base and willingness to regularly work on your investments will determine how well suited you’d be for active investing.
Active investing advantages
If you’re considering active investing as a strategy, some of the advantages include:
Flexibility: Arguably the biggest advantage of active investing is the flexibility it provides, particularly in the stock market. You can quickly pivot away from (or into) stocks that you think will change in value.
Control: This point is more relevant to property investors but active investing provides much more control over the direction of your strategy, including finding your own tenants; your holding patterns and running the property on your own terms – something you may not find with an asset such as a REIT.
Returns: Being an active investor can often mean you see higher returns, since you’re not spending money on working with partners such as letting agents or property management. The decision for investors in this case is to consider whether the time investment is achievable and worth the extra returns.
Active investing disadvantages
For those considering active investing, here’s some of the disadvantages:
Risk: Probably the biggest drawback of an active investment is the amount of risk you’re placing on your own decisions, experience and knowledge level. When you’re in control of your investment, it’s vital that you do as much research as possible as every decision relies on it.
Time: Active investing requires a big time investment. Aside from the planning and researching that’s necessary, you’ll also need to stay on top of the daily tasks. Time is one of your most precious resources and many active investors will struggle to also maintain their day job.
What is Passive Investing?
Passive investing is all about minimising effort and maximising returns. The passive investor will typically want to limit the amount of buying and selling within their portfolio, preferring to invest for extended periods of time. By adopting a long-term strategy, passive investors will maximise their returns in a cost-effective way rather than trying to make short-term gains.
Whether it’s investing in index funds or starting with a single buy-to-let property that scales into a portfolio, passive investing is ideal for the ‘hands-off’ investor. In many cases, passive investors will seek the support of partners that can manage the day-to-day of their investment. For property investors, this could be a letting agent; property manager or property investment company that can handle associated tasks while the investor enjoys the returns.
Passive investors will tend to:
- Leave control of investment maintenance to partners
- Utilise expert research while performing their own due diligence
- Invest alongside their day job
- Be investing from international regions
Passive investing advantages
If you’re considering passive investing as a strategy, advantages can include:
Expertise from professionals: Passive investing means you’ll likely be working with investment professionals across the sector. This means you’ll also have access to all of their knowledge and experience, which can be incredibly helpful in terms of sourcing tenants and finding new developments for future investments.
Freedom: An obvious benefit of passive investing is that the majority of the work is done by other people, meaning you’ll have much more free time during the course of your investment. This can make performing your own due diligence much easier.
Passive investing disadvantages
Higher overheads: A major disadvantage of passive investing is that by working with partners, you’ll likely be eating into your returns over the long-term. Although this can provide you with expertise, it does mean re-evaluating your financial planning.
Lack of choice: While this mainly applies to investment vehicles such as REITs and index funds, adopting a passive approach typically means you’ll be investing in different assets chosen for you. This means a single income stream but relatively lower risk than a traditional buy-to-let investment.
Active vs Passive Investing: Which One Should You Choose?
Ultimately, the debate between active vs passive investing relies on your own personal approach to investment. While some of you will see yourself in one of these categories, there’s many investors that may want the best of both worlds.
With this in mind, many investment advisors have outlined how a blend of active and passive investing can be viable for creating a diverse, manageable portfolio. There’s nothing to say you can’t have a number of buy-to-let properties in a long-term holding pattern while you actively manage your stock positions on a day-to-day basis.
The important thing to consider is your aversion to risk and willingness to learn. For most people, if you’re aiming for a long-term milestone such as retirement, there’s plenty of opportunities (and strategic merit) to utilise a mix of active and passive investing.