Active vs. Passive Management
I’ll start off with a disclaimer that I am not a financial adviser or expert. I’m just reporting on some of the things that I have learned over the past few months.
There are two main ways to manage your money: actively or passively. Active management is probably the most known method among financial newbies. It involves picking particular stocks/sectors and timing the market (buy low, sell high) or using a money manager to do the picking and timing for you. The ultimate goal in active management is to beat the market i.e. achieve returns that are greater than what the entire market returned.
Passive management on the other hand does not intend to beat the market. Instead, it is intended to track the market. Passive management does this through “indexing”. An index is a portfolio that represents an entire market or a portion of it. An example of an index is the S&P 500. An index fund is a mutual fund except that there are no managers making trades within the fund.
Passive management does sound very boring. There’s no adrenaline rush and no gambling hit. At this point in my explanation, you may not see how it could be beneficial. Why would you want to only match market returns? Why not try to beat it? Over the long term, however, the academic community has proved passive management to be the smarter choice. Over the next few posts, I’ll explain why and give you resources to look at for yourself.
