Active vs. Passive Investing

Active versus passive investing has been a decades-long debate among long-term savers. The active argument is that with time, energy and analysis, investors can beat an index or basket of fixed securities. The passive credo is simple: reams of data support the notion that purchasing a fixed basket, like an index fund, within most asset classes, will produce superior returns over long time horizons.

Legendary investors like Warren Buffett, John Bogle (the founder of Vanguard) and Charley Ellis, have extolled the virtues of passive investing, because even if low cost, tax efficient active management does exist – and indeed there are some stars out there – most investors either blow up their own plans or choose expensive active managers that routinely underperform.

Although I have been an advocate of passive investing for a while, I also know that many people really want to try the active route. That’s why I invited two guests, both of whom are active acolytes from Investor’s Business Daily (IBD?) to help me try to guide those folks who are willing to take a stab at the active approach.

Chris Gessel directs the news, market, mutual fund, company and technology coverage that appears in IBD and Justin Nielsen is a member of the markets team at IBD. They say that if you have the itch, there are five critical questions that you must ask yourself:

1. Can you admit that you are wrong?
2. Do you like history?
3. Can you fight the urge to bargain shop?
4. Do you like to stick to rules or go with your gut?
5. Do you like to get your hands dirty or leave it to the experts?

Regardless of whether you have some experience or not, Chris and Justin recommend that you start with small amounts of money, in order to test out whether or not you have the discipline to do it.

If interested in joining Investor's Business Daily, you can click here for their current special offer.

Have a money question? Email me here.