In investing, the two most basic things you need to decide when it comes to your portfolio strategy is whether you want to be an active investor or a passive investor.
Let’s look at what these two choices mean and which might be the best one for you…
If you are an active investor, you naturally want to make returns that are better than the market average, otherwise what’s the point of investing actively?
To do this, you are going to have to analyze and evaluate every stock that goes into your portfolio.
This may seem like a lot of work, but the potential for major profit is there.
The idea with this strategy is that you will be uncovering smaller (but still valuable) companies that large investment firms overlook.
The reason they do this is because they are focused on investing billions of capital and analyzing small companies just isn’t worth the time and effort for the return a large hedge fund requires.
The most popular strategy that active investors take (that I believe is totally wrong) is day trading or making frequent trades.
Can you make money doing this? Yes.
Is it reliable? No.
Day trading is effectively gambling as far as I’m concerned because even if you have a great strategy, you still need to make consistent profits.
And on top of that, you are spending on every trade you make, so there is a secondary way you are losing capital.
The third reason why day trading isn’t worth the time it takes, is that large investment firms have trading bots constantly browsing financial news and making trades based on that.
You can’t beat a robot whose sole purpose is to react to the latest news.
If you are a passive investor, you don’t want to be spending all your time pouring over financial statements all day.
You have other things you want to spend your time doing, like running your business (so you have money to invest) or taking up a hobby.
The way passive investing works is that you create a portfolio that is reasonably diversified throughout the entire market, and you also have investments outside of the stock market as well.
This could be investments in foreign markets and investments into securities like gold or non-U.S. currency.
The idea is to be safe when one section of your portfolio fails, if the American stock market crashes, you still have your foreign investments.
If the world’s markets go down, in the case of something like a pandemic, then you still have gold and other physical assets like a painting or luxury watch.
It is my personal belief that for the average investor, who doesn’t have time to be analyzing stocks all day and works a day job, the best thing for them is to invest passively.
That way their money is growing on its own, and it’s not rotting away in a bank account earning less than the yearly rate of inflation.
If you have the time to devote to active value investing, then there’s a good chance that you stumble across some very great investments that net you a huge return over time.
In a way, active value investing still requires patience, but the returns will be far greater than the market average.
It’s up to you if you want to spend your whole day allocating capital.
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What Are The 3 Basic Styles Of Investing?
Why It’s Important To Diversify