September 18: Pluses + Minuses of Active Investing vs. Passive Investing

Active investing is the more "hands-on" approach to investing- it involves someone who manages a portfolio. The goal of active investing is to take advantage of short term fluctuations. The portfolio manager, with a team of analysts, will try to determine when prices will change, taking money out of the market and putting it in again. Active investing requires the confidence that whoever’s investing the portfolio will know exactly the right time to buy or sell. Successful active investment management requires being right more often than wrong.

Benefits: 1) In-depth research and potential for outperformance- using skill to find hidden value and exceptional future growth prospects.

Risks: 1) May be more expensive- active management costs money, through both research and
transaction costs 2) More volatile- Not easy to pick a winning share (particularly consistently over
a longer period of time).

Passive Investing is the act of investing for long time periods. The strategy requires resisting the temptation to react to or anticipate the stock market’s every next move.

Benefits: 1) Diversification- wider spread of your investment across an entire index 2) low costs- low research costs and low transaction fees.

Risks: 1) Total market risk- Your investment reflects the index the fund follows, so if the

market as a whole falls you will lose money. 2) Performance constraints- Index funds are designed to provide returns that closely track their benchmark index, rather than seek outperformance.