Active vs Passive Investing
Derek is back in the studio for the first in-person podcast in a while. We discuss the pros and cons of passive vs active investing. Passive investing is a great plan long term, but it can be tough during bear markets. If you know what you are doing and have the knowledge and resources to help, active investing can protect your downside during market drawdowns.
Active vs Passive Investing
When it comes to investing, there are two primary types: passive vs active. Passive investing can be a great plan in the long-term, but the approach may be tough during bear markets. We tend to favor active investing for various reasons. The key is to know what you’re doing! If you have the knowledge and resources to help, active investing can protect your downside during market drawdowns.
Sometimes the market doesn’t behave like we think it should. For example, recently the jobs numbers were published as better than expected. Good news, right? Well, sometimes good news is bad news (and vice versa) and in this case the market didn’t react to the positive job number as one may think it should have. We’ve talked about the concept of second level thinking previously – meaning, we always recommend that you dig a little deeper vs taking things at face value. The Federal Reserve took the job number to mean the economy is still strong and as a result can withstand more pressure. Case in point, the latest inflation number. Did someone say 41-year high? You didn’t really think there would be a soft landing, did you?
So, the age-old question of which is better: the active or passive approach? Either way, things like time horizon, knowledge, resources, etc. all play a role in how one would answer this question. In the end, there are pros to both sides. A passive strategy can serve you well in the long run, but our vote goes for active (call us bias, if you wish). Passive investors may not enjoy the (potential) S&P 500 drawdowns throughout their investment timeframe but then again perhaps the set and forget mentally shields them from worrying about the swings. Active investing will likely protect your downside throughout your investment horizon. That’s mostly because active investors study and watch the market – then act accordingly. In fact, active investors, start your planning now! The market will turn around before we get the all-clear sign so start asking yourself what you want to buy and choose your entry points wisely.
As in previous podcasts, we stay true to our position that no one really knows how long this downturn will be. Some days the market rallies, while others all we see is red. Passive or active investors, we urge you to continue to pay attention to the environment and plan for the rebound.
Please note: This content is not a direct recommendation for investment. Investing involves risk including the potential loss of principal. Not all investments are suitable for all people. Crosby Advisory Group, LLC is a registered investment advisor in Ohio, Florida, and Texas.