Active Versus Passive: Which Do You Choose?

by Charles Rotblut, CFA

Active Versus Passive: Which Do You Choose? Splash image

How involved do you want to be with selecting individual stocks and securities? Though there is no right or wrong answer, it is an important question to ask. The answer has definitive implications for the types of investment vehicles you use. Two factors can help you determine the answer: your personal inclinations and the level of expenses you are prepared to incur.

Personal Inclinations

How likely are you to research individual stocks, mutual funds and exchange-traded funds (ETFs)? Consider both your personal interest level and your available time before answering. Do you enjoy analyzing financial statements, dissecting business models, staying on top of relevant financial news and sorting through fund return information? Alternatively, how much time can you realistically put into managing your portfolio?

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Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at


Angelo Ciavarella from North Carolina posted over 3 years ago:

After more than 25 years in investing,the Vanguard 500 index is the only fund that lost me money during the past 10 years.I have had good success with carefully researched active funds,and because of my age I now favor balanced funds.

Augustine from Texas posted over 3 years ago:


Kenneth from Idaho posted over 2 years ago:

The empirical data show that over the very long term on a risk-adjusted basis, neither timing strategies nor stock-picking strategies have added value. This is especially true for taxable accounts. Though there are some funds and managers that have "beat the market" over a 10 or even 20 year period, they are very few, difficult to identify in advance, and they frequently under-perform in subsequent periods.

It is interesting to note that Benjamin Graham, in one of his last interviews, effectively endorsed index funds and said that it may no longer be possible to identify the stocks that will out-perform.

In addition, Warren Buffet has a 10 year wager that an S&P 500 index fund will beat a set of hedge funds selected by a hedge fund manager. It is four years into the wager and they are virtually tied.

Given the difficulty and uncertainty in beating the market, why not pick the allocation that meets your situation and buy the appropriate mix of index funds given that they will beat the vast majority of active funds over the long term?

Ferdinand from Delaware posted about 1 year ago:

The topic active vs passive investing is to simple and deserves further discussion. For example, Investing in active international funds may be preferred to investing in international ETF's ; some Bond Investment categories
can only be invested in mutual funds etc. AAII can explain why this is so!

The soundest investment strategy is still a well balanced portfolio with an asset allocation using active and passive funds, consummate with the individual investors risk profile - and the discipline to rebalance the portfolio at specific intervals to "sell high and buy low". A mathematical analysis would show that with rebalancing , the investor would not have lost money with the Vanguard 500 Index.

At least for me, successful investing in active funds and ETFs requires a disciplined approach, selecting a balanced portfolio, an asset mix of equities and bonds according to the investors age based risk tolerance. THere is no way around investing some time to manage a portfolio - loosing money by chasing the hot fund of the day is easy, making an adequate return on one's investment requires some diligence.

AAII provides all the tools and research needed for the individual investor to be successful over time. Also, Ihave found the regional chapter meetings to be very useful in the learning process that really never stops.

Devin from Nebraska posted about 1 year ago:

When the bond bubble bursts, allocation models will go out of favor.

Vern from California posted about 1 year ago:

In my active and passive investing experience over 55 years, I believe that using a personal evaluation progam and the Investor's Business Daily- monday edition for data provides a disciplined effective basis for development of a personal mediun risk, asset allocation Portfolio. The Portfolio will consist of selected high quality, Buy/Hold catgory rated individual stocks,REITS and bonds provides a capability of beating other investment methods and eliminating all hidden and active management fees. My personal methods and results are shown on website

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