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Active investment

What is active investment?

Active investment refers to an investment strategy that involves frequent buying and selling of assets in an attempt to outperform the market or achieve higher returns compared to a benchmark index. Active investors typically rely on their own research, analysis, and market insights to make investment decisions and actively manage their portfolios.

What is the difference between active and passive investment?

The key difference between active and passive investment lies in the level of involvement and strategy employed:

Active Investment:

  • Strategy: Active investors seek to identify mispriced securities or market inefficiencies and capitalise on them through active trading and portfolio management.
  • Involvement: Active investors devote significant time and effort to researching, analysing, and monitoring investment opportunities, often making frequent trades and adjustments to their portfolios.
  • Goal: The primary goal of active investment is to generate alpha, or excess returns, by outperforming the broader market or specific benchmarks.

On the contrary, passive investment refers to an investment strategy in which an individual or entity seeks to achieve returns on their investments by tracking the performance of a specific market index, asset class, or portfolio of assets rather than actively selecting and managing individual investments. They aim to match the performance of a market index by holding diversified portfolios of securities that mirror the index with the goal of achieving market returns with minimal effort and cost.

Is active investment risky?

Active investment can be riskier compared to passive investment for several reasons:

  • Higher costs: Active investing often involves higher trading costs, such as brokerage fees, commissions, and taxes, due to the frequent buying and selling of securities.
  • Higher volatility: Active trading can result in higher portfolio turnover and increased volatility as investors react to market news, events, and fluctuations. Rapid buying and selling of assets can lead to higher risk exposure and potential losses during periods of market turbulence.
  • Manager skill: Successful active investing requires skill, expertise, and market timing, which not all investors possess. Poor investment decisions or mistimed trades can result in underperformance or losses compared to passive strategies.

While active investment offers the potential for higher returns, it also comes with higher risks and costs. Investors should carefully consider their investment objectives, risk tolerance, and time horizon before choosing between active and passive strategies. Additionally, diversification and disciplined portfolio management are essential regardless of the chosen investment approach.

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