Active Versus Passive: Which Do You Choose?
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.
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How likely are you to research individual stocks, mutual funds and exchange-traded funds? 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?
Some individual investors truly enjoy analyzing stocks and bonds and set aside time every week (or even every day) to do it. Others find quarterly earnings reports to be the most boring thing they’ve ever read. Some really want to get into the nuts and bolts of security and fund analysis, but just have too many other demands on their time to do it regularly.
If you are someone who is willing and able to analyze individual securities and funds, you are more suited to following an active investment strategy. Active management means you decide which stocks, bonds, mutual funds and ETFs to invest in, and when to sell them. Alternatively, if you are someone who does not want to do the regular analysis or if you lack the time to do it, a passive strategy might be more suitable. A passive strategy involves holding mutual funds and ETFs that are designed to mimic the returns of an index, such as the S&P 500.
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