Business
“Passive investing is an investment strategy to maximize returns by minimizing buying and selling.” - Investopedia “Active investing refers to an investment strategy that involves ongoing buying and selling activity by the investor.” - Investopedia Why does talking about this matter? What does it have to do with financial planning? This is what most people do, and what makes most people successful over the long haul… this is how most people invest in their 401kReasons for Passive InvestingIt’s easyTo be fee efficientTo build wealth gradually.To not seek to profit from short-term price fluctuations or market timing.The underlying assumption of passive investment strategy is that the market posts positive returns over time.It’s hard to outthink the marketDrawbacks of Passive InvestingNot that sexy.Too limited: Passive funds are limited to a specific index or predetermined set of investments with little to no variance; thus, investors are locked into those holdings, no matter what happens in the market.Smaller potential returns: By definition, passive funds will pretty much never beat the market, even during times of turmoil, as their core holdings are locked in to track the market. Sometimes, a passive fund may beat the market by a little, but it will never post the big returns active managers crave unless the market itself booms. Active managers, on the other hand, can bring bigger rewards (see below), although those rewards come with greater risk as well.