What is Passive Investing?

Passive investing is all about taking a hands-off approach. Instead of trying to beat the market, passive investors aim to match the market’s performance. The most common way to do this is by investing in index funds, which are designed to track well-known stock market indices, like the S&P 500 or the Dow Jones Industrial Average.

Let’s say you want to invest in the S&P 500, which consists of 500 of the largest companies in the U.S. While it’s tecnically possible to buy all 500 stocks yourself, that would be complicated and insanely expensive. Instead, you can invest in an S&P 500 index fund, which will automatically buy all the stocks in the index for you, in the exact proportions needed to mirror the S&P 500. This way, when the S&P 500 goes up, your investment goes up. If it goes down, your investment does too.

The goal isn’t to beat the market—it’s to match it. And because there’s no active decision-making involved, the fees are generally very low. In fact, as a passive fund manager, the fewer noticeable decisions the better. With less buying and selling happening behind the scenes, fewer costs are passed on to you, the investor. As an investor of an index fund, the primary value proposition is keeping costs low, getting some exposure to the markets, letting it do what it does. End of story.

Over time, markets tend to rise. While there are dips and downturns along the way, history shows that the stock market generally trends upward over long periods. Passive investing lets you ride these waves without stressing about short-term market fluctuations.

What is Active Investing?

Active investing takes on a more hands-on approach. Instead of simply trying to match the market, active investors aim to beat the market. Active investment funds are managed by professionals who analyze the market, pick specific stocks, bonds, or other assets, and try to outperform a benchmark, such as the S&P 500.

Active fund managers use various strategies to try to achieve higher returns than the market. Some rely on deep research, looking at company fundamentals, industries, and broader economic trends (think of Warren Buffett’s style of investing). Others might use more quantitative approaches, using complex mathematical models to find inefficiencies in the market. In both cases, the goal is to outperform the benchmark and generate higher returns for investors.

Because this approach requires constant analysis and decision-making, active funds tend to charge higher fees than passive funds. You’re paying for a team of experts to actively manage your money, which makes these funds more expensive to run.

Which Strategy Is Right for You?

Choosing between active and passive investing depends on your financial goals, risk tolerance, and how involved you want to be in managing your investments.

• Go Passive if:
  • You want a low-cost, long-term investment strategy with minimal management.
  • You believe in the power of markets to rise over time and don’t want to try to beat the market.
  • You’re comfortable with taking a hands-off approach and letting your investments grow at the pace of the broader market.
• Go Active if:
  • You’re willing to pay higher fees in exchange for the chance of higher returns.
  • You believe that professional managers can pick winners and outperform the market over time.
  • You want more flexibility to respond to market trends or invest in niche areas, like tech startups or emerging markets.

Although there are different ways to be an active manager, they all share one similarity: being successful over the long run is extremely difficult. At Investable, we believe in the Efficient Market Hypothesis. Basically, that means that over time, it is nearly impossible to maintain an edge over the market. Sure, you can beat it in spurts, but over time, wins and losses even out and you kind of just break even. However, we also acknowledge that there are active funds out there that are exceptional. Some have proven to maintain a sustainable competitive advantage, and those investment funds deserve to be commended.

Active vs. Day Trading: What’s the Difference?

Let’s be clear. Day trading is not investing. While investing is planning for your financial future by putting your hard-earned savings in various calculated investments, day trading is more speculative. You are essentially buying a security with the intention to “flip” it within seconds, minutes, or hours. Does that seem calculated? As believers of efficient markets at Investable, our view is that information in the markets travel in milliseconds. If there is an opportunity to take advantage of “new news”, it is reflected in prices instantaneously. There are professionals who make a ton of money doing this very thing. So sorry to burst your bubble, but whatever day trading method you’re using is not as good as theirs.

It’s important not to confuse active investing with day trading. While active investing involves thoughtful, long-term strategies aimed at outperforming the market, day trading focuses on making quick profits through buying and selling stocks within short periods—sometimes within minutes or hours. Active fund managers have a long-term plan, while day traders rely on short-term price movements, which is far riskier and more speculative.

Finding the Balance

In the debate between active and passive investing, it’s not always about choosing one or the other—sometimes the best strategy is a mix of both. At the end of the day, your investment strategy should match your financial goals, risk tolerance, and how involved you want to be in the investing process. Whether you choose active, passive, or a combination of both, understanding the difference will help you make informed decisions that work best for your portfolio.