Which Should I Pick: Active or Passive Investing?


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Active investing vs. passive investing generally refers to the two main approaches to structuring mutual fund and exchange-traded fund (ETF) portfolios. Active investing is a strategy where human portfolio managers pick investments they believe will outperform the market — whereas passive investing relies on a formula to mirror the performance of certain market sectors.

Which approach is better, active investing vs. passive? There seems to be no end to this debate, but there are factors that investors can consider — especially the difference in cost. Because active investing typically requires a team of analysts and investment managers, these funds are more expensive and come with higher expense ratios. Passive funds, which require little or no involvement from live professionals because they track an index, cost less.

Also, there is a body of research demonstrating that indexing typically performs better than active management. When you add in the impact of cost — i.e. active funds having higher fees — this also lowers the average return of many active funds. Following are a few more factors to consider when choosing active investing vs. passive strategies.

Active vs Passive Investing: Key Differences

The following table recaps the main differences between passive and active strategies.


Active Investing Definition

What is active investing? Active investing is a strategy where an investor attempts to beat the market by trading individual stocks, bonds, or other securities.

With active investing, either an individual investor could be the one trading securities in their own portfolios, or portfolio managers of actively managed exchange-traded funds (ETFs) and mutual funds could be the one buying and selling assets to outperform the market or a specific sector.

Active investors and actively-managed funds often trade stocks and securities to profit in the short term. Short-term trading, like day trading, can be difficult as it requires the investor to be an expert on the financial markets and the factors impacting stock prices. It also requires the investor to have a good deal of discipline, as short-term stock picking can be a volatile and risky endeavor.

Active Investing Pros and Cons

Active investing is what live portfolio managers do; they analyze and then select investments based on their growth potential. Active strategies have a number of pros and cons to consider when comparing them with passive strategies.

Pros and cons active investing


  • One potential advantage of having a real person crunching numbers and making investment decisions is that they may be able to spot market opportunities and take advantage of them. A computer algorithm is not designed to pivot the way a human can, which might benefit the performance of an actively managed ETF or mutual fund.
  • Whereas a passive strategy is designed to follow one market sector index (e.g. the performance of large cap U.S. companies via the S&P 500 index), an active manager can be more creative and is not limited to a single sector.
  • The number of actively managed mutual funds in the U.S. stood at about 6,585 as of June 2023 vs. 517 index funds, according to Statista. Given that there are many more active funds than passive funds, investors may be able to select active managers who have the kind of track record they are seeking.


  • The chief downside of active investing is the cost. Hedge funds and private equity managers are one example, charging enormous fees (sometimes 10%, 15%, 20% of returns) for their investing acumen. But even standard actively managed funds, which may charge 1% or 1.5% or even 2% annually, are far higher than the investment fees of most passive funds, where the annual expense ratio might be only a few basis points.

  • The majority of active strategies don’t generate higher returns over the long haul. According to the well-known SPIVA (S&P Indices vs. Active) 2022 year end scorecard report, 95% of U.S. active equity funds underperformed their respective S&P indexes over the last two decades. So investors who are willing to pay more for the insight and skill of a live manager may not reap the rewards they seek.
  • A professional manager may create more churn in an actively managed fund, which could lead to higher capital gains tax.

Passive Investing Definition

Passive investing strategy is when an investor buys and holds a mix of assets for an extended period. Many passive investors will invest in passively-managed index funds, which attempt to replicate the performance of a benchmark index. Passive investors are not necessarily trying to beat the market.

Passive Investing Pros and Cons

The term “passive investing” may not have a strong positive connotation, yet the funds that follow an indexing strategy typically do well vs. their active counterparts.


  • Passive strategies are more transparent. Because index funds simply track an index like the S&P 500 or Russell 2000, there’s really no mystery how the constituents in the fund are selected nor the performance of the fund (both match the index).
  • As noted above, index funds outperformed 79% of active funds, according to the SPIVA scorecard.
  • Passive strategies are generally much cheaper than active strategies.
  • Passive strategies can be more tax efficient as there is generally much less turnover in these funds.


  • Because passive funds use an algorithm to track an existing index, there is no opportunity for a live manager to intervene and make a better or more nimble choice. This could lead to lost opportunities.
  • Passive strategies are more vulnerable to market shocks, which can lead to more investment risk.

Which Should You Pick: Active or Passive Investing?

Deciding between active and passive strategies is a highly personal choice. It comes down to whether you believe that the active manager you pick could be among the few hundred who won’t underperform their benchmarks; and that the skill of an active manager is worth paying the higher investment costs these strategies command.

You could also avoid treating the active vs. passive investing debate as a forced dichotomy and select the best funds in either category that suit your goals.

The Takeaway

Active vs. passive investing is an ongoing debate for many investors who can see the advantages and disadvantages of both strategies. Despite the evidence suggesting that passive strategies, which track the performance of an index, tend to outperform human investment managers, the case isn’t closed.

After all, passive investing may be more cost efficient, but it means being tied to a certain market sector — up, down, and sideways. That timing may or may not work in your favor. Active investing costs more, but a professional may be able to seize market opportunities that an indexing algorithm isn’t designed to perceive.

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org

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How good are robo-investors at picking investments?

How good are robo-investors at picking investments?

We’ve all seen the movies where robots try to take over the world disguised as humans, use humans as living batteries, smooth-talk red lights, or try to jettison astronauts into outer space.

And this might lead you to question whether robots have your best interest in mind. Yet, far from the drama of Hollywood, robo-investing — which provides investment advice and management with limited human intervention — can be a useful, low-cost financial tool to help you reach your goals.

Related: Robo advisor vs. financial advisor: Which should you choose?

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Traditionally, an investment advisor would work with you to build an investment portfolio, helping you choose an allocation of stocks, bonds and other investments, and periodically rebalance them as the market and your needs change. All of this human interaction makes traditional investment advising fairly pricey.

A robo-advisor, on the other hand, uses computer algorithms to build and manage your investment portfolio — often using low cost index and exchange-traded funds — with limited human interaction.

Cut out the human managers and the price for investment services goes down considerably. In part due to their low cost, robo-advisors are becoming increasingly popular. In 2017, robo advisors passed the $200 billion mark in aggregate assets under management, and that number is likely to keep growing.

What’s more, many robo-advisers may offer low or no investment minimums, which means you can start investing any time.


Some robo-advisors charge fees on a per-trade basis, while some charge fees based on a percentage of your portfolio value. While traditional advisors typically charge a fee of around 1% of assets under management, robo-advisors’ fees range from 0% to 0.89% with fees typically hovering around 0.25% to 0.30%.

The fees charged by robo-advisors are important to pay attention to even if they seem low. Consider that a 0.25% fee reduces an annual return of 7% to 6.75%. This reduction may not seem like much, but over the course of many years, these fees start to add up.

Additionally, the use of low-cost index funds and exchange-traded funds tend to drive the cost savings even higher. In 2017, the average expense ratio of a passive investment (such as an exchange-traded fund) was .15% compared to the average expense ratio of .72% for actively managed funds.

When you add these two components up, the average robo-advisor using passive investments could be 1.32% less per year than the average human advisor using actively managed funds. As balances grow over time this can have a fairly substantial impact.

This is all to say you should carefully weigh fee options against the services different robo-advisors offer to make sure that the fees you are paying are worth it to you. For example, a slightly higher fee might give you access to a human financial advisor who can offer you investment advice. If that kind of service is important to you, it might be worth paying a little bit extra.

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Aside from the fees you’ll pay, there are a number of other factors worth considering when you’re deciding whether a robo-advisor is right for you, including:

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Most robo-advisors use a mix of ETFs and low-cost index funds. ETFs hold a basket of stocks or bonds and are built to mirror an index, such as the S&P 500. They are traded throughout the day. Index funds are mutual funds that also hold a mix of investments and track an index.

Mutual funds only trade once per day. Both types of investments are more diversified than an individual stock because of the basket of assets that they hold. When choosing a robo-advisor make sure that they offer the types of investments that you want to include in your portfolio.

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You’ll typically be offered two broad types of accounts when you consider a robo-advisor: a retirement account or a regular taxable investment account. A standard investment account has no limits on the amount of money you can invest.

Retirement accounts, such as IRAs and 401(k)s offer specific tax advantages.

Be clear about your goals when you choose your account type. If you’re saving for retirement, the tax advantages of retirement accounts are hard to beat.

But if you’ll need access to the money sooner than that, consider a regular taxable account. You don’t want to be slammed with the early withdrawal penalties that come with dipping into retirement accounts too early.


Robo-advisors usually offer a fixed number of portfolio options designed to cover various levels of risk. The robo-advisor will typically recommend one of these portfolios based on your goals, investment preferences, comfort with risk and time horizon. Robo-advisors will usually match you with a portfolio by giving you a questionnaire.

This questionnaire doesn’t lock into a portfolio, so you might be able to override the default selection to choose a portfolio of your choice.


Once you’ve signed up for an account with a robo-advisor, you will typically be offered a range of automated services.


Based on the process described above, let’s assume you were placed in an allocation that consists of a mix of 60% stocks and 40% bonds. Over time this allocation will likely shift a bit as investments fluctuate based on the movement of the market.

For example, the stock market may grow faster during a particular period of time than the rest of your portfolio. Rebalancing helps you buy and sell assets to realign the investments inside your portfolio to the desired allocation.

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Many robo-advisors make it easy to establish sound financial habits, such as ongoing saving, by establishing recurring contributions. A common example of recurring contributions is in an employer sponsored plan such as a 401k. The value of recurring contributions is that it automates the tough decision of saving for the future. This strategy is not just limited to your 401k, and might help you be more disciplined with your other accounts.


Some robo-advisors combine the cost-effectiveness of technology with the expertise of humans by offering access to financial professionals. This hybrid approach might enable investors to ask questions, discuss goals and plan for the future. Robo-advisors might charge for this service, but it tends to be optional if it is offered.


There are some potential drawbacks to the one-size-fits-all approach of robo-advisors.

Those interested in investing in complicated assets, such as real estate investments or trusts, may want to look to professionals for help doing so.

That said, robo-advisors can be a great financial tool, especially for those who are just starting out investing and who don’t have complicated investment needs.

For example, Millennials who are still accumulating assets may find that robo-advisors are a good fit. The low cost of robo-advising has lowered the barrier to entry for many investors, giving them access to tools once reserved for higher-net-worth individuals.

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

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