Before you choose your investment strategy, it’s rather important to understand your own investment goals and risk tolerance level. Every person has his or her own risk tolerance level and understanding it for yourself is perhaps the determining factor for you to decide which investment method is best.
You may wonder, as most investors do, what is the better option for your investment goals. The level of risk you’re willing to take with your hard-earned money can often determine how you’re willing to spend and invest. After all, higher risks can often yield higher returns. Unfortunately higher risks can also mean compound losses too.
Low risk might equate to lower returns, but it’s commonly believed that a low guaranteed gain is far better than a risky bet on a higher risk return that may not be realized. These are among some considerations you have to make when deciding whether you make your investments in an active or passive way.
Active or Passive Investments?
Actively managed investments, such as mutual funds, try to beat the market performance of a benchmark index, such as the S&P 500, by choosing the best 100 or so performing stocks based on a likelihood of receiving good returns. On the other hand, a passively managed investment will simply accept what that market performance is and invest in all 500 stocks on the index.
It’s crucial to have an honest understanding of your own investment risk tolerance level because this will determine which way you’ll go: active or passive investing.
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