Active Investing | SoFi (2024)

FAQs

What is considered active investment? ›

Active investing involves a 'hands-on' approach. It requires the investor to manage the investment proactively by acting as a portfolio manager. The primary aim of active investing is to beat the average returns of index investing by taking advantage of short-term fluctuations in share prices.

Active investment is a form of investment strategy that involves actively buying and selling assets in the hope of making profits and outperforming a benchmark or index. An example of an active investor is a hedge fund manager, who constantly monitors the market and trades when they see an opportunity to make money.

Passive investing is buying and holding investments with minimal portfolio turnover. Active investing is buying and selling investments based on their short-term performance, attempting to beat average market returns. Both have a place in the market, but each method appeals to different investors.

Active investing means investing in funds whose portfolio managers select investments based on an independent assessment of their worth—essentially, trying to choose the most attractive investments. Generally speaking, the goal of active managers is to “beat the market,” or outperform certain standard benchmarks.

While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds come in both active and indexed varieties, but most are actively managed.

In general terms, active management refers to mutual funds that are actively managed by a portfolio manager. Passive management typically refers to funds that simply mirror the composition and performance of a specific index, such as the Standard & Poor's 500^® Index.

Virtually all real estate investments are considered 'passive income'. That's because you generate revenue from the money that you invested rather than the work that you do. You don't actually work for the income in the same way that you would earn a job salary. However, there may be some crossover.

In simple terms, active investors attempt to outperform the returns of a specific benchmark, whereas passive investors accept the market return by tracking a specific index.

You may already be making passive investments through an employer-sponsored retirement plan such as a 401(k). If you're not, it's one of the easiest ways to get started and enjoy the benefits of passive investing.

Is active trading worth it? ›

Advantages of Active Trading

By actively monitoring the market and making informed decisions, traders can take advantage of short term price movements and profit from market volatility.

Active Funds Fell Short of Passive Funds in 2023

Less than one out of every four active strategies survived and beat their average passive counterpart over the ten years through December 2023. One type of active investment strategy generally trails in long-term success rates.

Passive investing targets strong returns in the long term by minimizing the amount of buying and selling, but it is unlikely to beat the market and result in outsized returns in the short term. Active investment can bring those bigger returns, but it also comes with greater risks than passive investment.

The clearest example of active investing is in stocks and shares. Here, an active investor will buy and sell stocks using a broker or a fund manager, and the objective is to invest in companies that will outperform a specific index.

Let's understand this with the help of examples. Equity mutual funds, debt mutual funds, hybrid funds, or fund of funds, are all actively managed funds.

Investing activities include purchases of long-term assets (such as property, plant, and equipment), acquisitions of other businesses, and investments in marketable securities (stocks and bonds).