Perhaps the burning question for any beginner investor is: Which investment method is best? There are two investment options you can choose from: passive or active investments.
To be an active investor means you understand that not all stock market pricing move at the same rate or even in the same direction with the entire stock market as a whole. Hence you will actively single out individual stocks that you predict have the likelihood of out-performing the over-all index. Actively managed investments, such as mutual funds carry higher costs. This is partly associated with higher trading costs as well as time costs involved with researching likely stock picks and other management costs.
In a way this is similar to day trading on the stock market – if you choose to do the active investing by yourself rather than hire the services of a fund manager. You spend the time researching stocks that are likely to outperform the index and you manage your portfolio personally, buying and selling as you try to capture profits and minimize losses.
For a passive investor, he or she understand that the market index moves up or down. Having a passively managed fund that is broadly diversified across almost all the available stocks on the stock index is likely to return average returns that are comparable with the returns shown by that index.
One advantage is that passively managed funds often carry lower fees; although this in itself may tend to offer lower returns. And there are investors who favor lower returns because they believe that receiving a low return is better than risking the chance of receiving no return at all.
Again if you’re the type of investor who doesn’t wish to trust their money to a fund manager, then your passive investing option is to acquire a a broadly diversified stock portfolio which you’ll hold for the long term. Then you have the choice of allowing your stocks to simply sit in your portfolio and collecting the dividend or you can reinvest your dividend earnings back into your portfolio to acquire further stocks.
An honest understanding of your own risk tolerance level allows you to choose for yourself which investment strategy you’ll follow: active or passive investing.