An important first decision for investors…Active or Passive management
Eventually, there comes a time when every investor must make a choice: Whether to invest to achieve future economic objectives or to invest for entertainment. Unfortunately, they usually don't go hand in hand. If investing for pleasure and entertainment is your purpose, then you have a legitimate reason to pursue active investing. It is much more entertaining than passive investing. You'll have big winners and losers. You'll have all kinds of interesting reasons for investing in this or that. You'll discuss market forecasts and hot stocks at cocktail parties and other social events. In short, you'll really be "into" the market.
The problem with this scenario, however, is that you will probably lose money...just as the vast majority of investors do.
If, instead, you want to maximize the probably of achieving your financial goals, then passive investing is the clear choice. Passive investing should not be thought of as a "hot" or short term investment strategy. Its main appeal is not to investors who expect to make a "killing" in the market. Rather, the strategy should attract long-term investors who seek market-type returns through broadly diversified portfolios.
Take a closer look at the difference between the two investing styles:
Active Investing
Active investors believe that there is a constantly changing set of investment opportunities that can be exploited by skillful investment managers. These managers buy and sell securities..."actively" attempting to exploit these opportunities. These activities are generally referred to as market timing and/or stock picking.
Passive Investing
Passive investors, on the other hand, make no attempt to "bet" on individual stocks or narrow industry sectors in an attempt to outpace the market. Instead, they attempt to replicate the investment results of a target index by holding all or a representative sample of the securities in the index. Thus, a passive investment approach emphasizes broad diversification, low turnover and market returns.