Active Investing
- Ronald van Rensburg
- Aug 9, 2022
- 2 min read
Another investment style, apart from the passive investing which I discussed, is active investing. Many people don't have the patience to sit and wait for something to happen over time. Similar to people that you don't tell to "try and relax" because it will just remove what little patience is there already. Similarly, investors that cannot wait for profits to realize across a long period of time and wants to make something happen now would look more into active investing.
As the name suggests, active investing requires the investor to be actively involved in the portfolio. This means having your nose in the fundamentals (maths) and technicals (charts), to take advantage of market price movements, to work at making profits which in turns leads to a higher level of complexity. As you would recall, passive investing mirrors market performance, where with active investing the investor tries to outperform the market with the buying and selling of short-term trades.
With actively buying and selling over short periods, this trading style does generate a high amount of costs in conjunction with the higher volumes of trades associated with this investing style. However the risk on the portfolio can be managed better by managing the exposure on the portfolio through reducing trading on a losing instrument and increasing trading on a well performing instrument. Additionally, this provides more flexibility on a portfolio as it can be more outcome focused and the investment portfolio can be more customized to the goals and needs of the investors.
Active investing does entail a higher risk in relation to the potential of higher returns. However an ideal investment portfolio should incorporate both passive and active investing in its strategies, where the investor uses active strategies to hedge against downturns on the passive strategies. Always remember that a good investment portfolio should be well diversified with the lowest amount of risk exposure possible while generating a good return on investment.
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