Active Vs. Passive Investing: Which One is Right for You?

There are lots of different ways to invest your money, but most can be broadly classified into two main categories: active or passive. These are two very different strategies for investing, naturally attracting very different types of investors.

So which one is right for you and your money?

Before that can be answered, we need to talk about the differences between these two methods.

But first, a definition of each is in order:

Active investing - Active investing requires your near-constant attention; in other words, you must be actively involved. An active investment strategy involves frequent buys and sells, with market fluctuations dictating gains or losses over a short period of time.

Passive investing - With a passive investing strategy, an investor buys an asset, and then holds onto it, building wealth over a longer period of time. Because of this longer duration of ownership, there’s no need for the investor to take an active role in managing or manipulating the investment.

Both active and passive investment strategies can be applied to various types of assets, including stocks, mutual funds, real estate and more.

Now, there are benefits and drawbacks to each strategy, and investors weigh these carefully before making their decisions. Here are a few of those:

Active - ProsActive - ConsPassive - ProsPassive - Cons

• Potential for amazing profits in a short period of time

• Time- and energy-consuming
• Fees associated with buying/selling assets

• Doesn’t require as much time
• Can be less stressful
• Wealth is built over time, which can provide more stability

• You often don’t have immediate access to profits
• Must be patient and have trust in the market

Now let’s talk about these strategies as they apply to my favorite type of investment, real estate. An investor adopting an active strategy as it pertains to real estate is most likely flipping homes, while a passive investor is more interested in a buy-and-hold plan.

When it comes to deciding which of these methods is best for you, there are a few questions you need to find answers to:

• What are the financing costs associated with each?
• What repairs need to be made to either sell or rent the property?
• What are the holding costs?
• And most importantly, which one will make the most money for you?

Some properties are ideal for flipping, while others are more lucrative as a long-term rental property. Your chosen strategy will also depend on your current funds, how much time you have to commit, and what your financial goals are in terms of realizing short- and long-term profits.

Unfortunately, I can’t definitively answer for you whether active or passive investing is the best strategy. For me, passive investing has proven to be the best option, and my rental properties provide me with both short term (monthly cash flow) and long term (appreciation) profits. Would it be the same for you? Yes, so long as you’re making good investments. But an active investment strategy may be just as profitable. Consider the pros and cons and your own situation, and then make your decision. And remember, either way you go, what you put in is what you’ll get out of it.