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Try It! Test Out Investing Strategies
First off, a quick overview of just what it means when you hear active and passive investing. In short, active investing is generally a strategy focused on trying to beat the performance of the market. Passive investing, meanwhile, seeks to track or mirror a market index rather than beat it.
Many investors want to know if it's better to purchase an actively managed mutual fund or exchange-traded fund (ETF), or take the passive route and buy an index fund. Will the extra fees you pay for the expertise of a portfolio manager lead to higher returns, or should you just try to match the market?
This question has no definitive answer, but thinking about a few key considerations may help you reach your own conclusions.
For the long-term equity investor, the debate between active and passive strategies rests on three main considerations:
- Market efficiency
- Portfolio construction
- Historical performance
Find out more about each in inThe Active versus Passive Debate.
There is no definitive answer on which approach is best. As a self-directed investor, it's up to you to choose the investment philosophy that fits your beliefs and your situation. Indeed, you may wish to mix actively and passively managed investments in your portfolio. Checking Fund Facts or the management company's website for clues about how an investment product is managed can help you determine if it's active or passive. Often, an ultra-low fee would be an indication of passive management, while higher fees are generally associated with active management.
Whether you're an active or passive investor, a variety of products can help you to achieve your investing goals. For tips on making investment choices, check out the Researching Investments Guide.
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Now, let's move on to the concepts mentioned in the article you provided.
Active and Passive Investing
Active investing is a strategy focused on trying to beat the performance of the market, while passive investing seeks to track or mirror a market index rather than beat it. The debate between active and passive strategies for long-term equity investors rests on three main considerations: market efficiency, portfolio construction, and historical performance.
Actively Managed Mutual Funds vs. Passive Index Funds
Many investors want to know if it's better to purchase an actively managed mutual fund or exchange-traded fund (ETF), or take the passive route and buy an index fund. There is no definitive answer to this question, as it depends on individual preferences and beliefs. Some investors may choose actively managed funds for the expertise of a portfolio manager, while others may prefer passive index funds to track the market. It's important to consider factors such as fees, management style, and investment goals when making this decision .
Market Efficiency
Market efficiency is one of the considerations in the active versus passive investing debate. It refers to how quickly and accurately prices in the market reflect all available information. In an efficient market, it is difficult for investors to consistently outperform the market. This is one of the reasons why some investors choose passive investing, as it allows them to track the market and avoid the challenge of trying to beat it.
Portfolio Construction
Portfolio construction is another consideration in the active versus passive investing debate. It involves selecting a mix of assets that align with an investor's goals and risk tolerance. Active portfolio management involves making strategic investment decisions to try to outperform the market, while passive portfolio management involves tracking a market index. The choice between active and passive portfolio construction depends on an investor's beliefs and preferences.
Historical Performance
Historical performance is an important factor to consider when evaluating investment strategies. It involves analyzing the past performance of different investment approaches to assess their track record. However, it's important to note that past performance does not guarantee future results. Investors should consider a variety of factors, including fees, risk, and market conditions, when evaluating historical performance.
Mixing Active and Passive Investments
As a self-directed investor, you have the flexibility to choose the investment philosophy that fits your beliefs and situation. You may wish to mix actively and passively managed investments in your portfolio. Checking Fund Facts or the management company's website can provide clues about how an investment product is managed. Generally, ultra-low fees are associated with passive management, while higher fees are associated with active management .
Additional Resources
If you're interested in learning more about investing and making investment choices, you can check out the Researching Investments Guide provided by RBC Direct Investing. This guide offers tips and insights to help you achieve your investing goals.
I hope this information helps! Let me know if you have any further questions.
